HISTORY 

OF 

BUSINESS  DEPRESSIO 


lit 


Otto  CXightner 


LIBRARY 

UNIVERSITY  OP 
CALIFORNIA 
SAN  DIE9O 


•  '  ,  .V. 

: ' ' , 


V 


To  one  of  whom  it  cannot  be 
said:   "0,  ye  of  little  faith!" 


THE  HISTORY  of 
BUSINESS  DEPRESSIONS 


BY 

OTTO  C.  LIGHTNER 


A  Vivid  Portrayal  of  Periods  of  Economic  Adversity 

from  the  Beginning  of  Commerce 

to  the  Present  Time 


PUBLISHED   BY 

THE  NORTHEASTERN   PRESS 
119  Nassau  St.         NEW   YORK 


Copyright  1922 

By  The  Northeastern  Press 

119  Nassau  St.  New  York 


CONTENTS 


Page 

INTRODUCTION  7 

VICISSITUDES  OP  ANCIENT  COMMERCE 13 

TRADE  DECLINES  OF  THE  MIDDLE  AGES 26 

DEPRESSIONS  OF  MODERN  EUROPE — (From  the  End  of  the  Medi- 

aevel  Period  to  the  Nineteenth  Century) 34 

FOREIGN  DEPRESSIONS  FROM  THE  BEGINNING  OF  THE  19TH  CEN- 
TURY TO  THE  PRESENT  TIME 51 

DEPRESSIONS  OF  THE  COLONIAL  PERIOD 74 

CRISES,  PANICS  AND  DEPRESSIONS  DEFINED 81 

THE  DEPRESSION  OF  1785-89 91 

THE  DEPRESSION  OF  1808-9 101 

THE  DEPRESSION  OF  1814 105 

THE  DEPRESSION  OF  1819-20 109 

THE  DEPRESSION  OF  1825 121 

THE  DEPRESSION  OF  1837-39 124 

THE  DEPRESSION  OF  1847-48 139 

THE  DEPRESSION  OF  1857 141 

THE  DEPRESSION  OF  1860-61 148 

THE  DEPRESSION  OF  1868-69 153 

THE  DEPRESSION  OF  1873-75 160 

THE  DEPRESSION  OF  1878 170 

THE  DEPRESSION  OF  1884 175 

THE  DEPRESSION  OF  1889-90 181 

THE  DEPRESSION  OF  1893-95 186 

THE  DEPRESSION  OF  1903 197 

THE  DEPRESSION  OF  1907-08 200 

THE  DEPRESSION  OF  1914 218 

THE  DEPRESSION  OF  1920-21 223 

MINOR  DEPRESSIONS 237 

OUR  RELATIONS  TO  FOREIGN  DEPRESSIONS 241 

CAUSES  OF  DEPRESSIONS 246 

SPECULATION,  THE  OUTSTANDING  CAUSE  OF  DEPRESSIONS 278 

THE  LABOR  QUESTION  IN  DEPRESSIONS--  288 


CONTENTS— CONTINUED 


AGRICULTURE  AND  DEPRESSIONS 305 

THE  TARIFF  AND  DEPRESSIONS 325 

DEPRESSIONS  AND  FOREIGN  TRADE 336 

THE  RAILROADS  IN  TIMES  OF  DEPRESSION 348 

THE  MONEY  QUESTION  AS  A  FACTOR  IN  DEPRESSIONS 362 

PIG  IRON  AS  A  BAROMETER  OF  BUSINESS 377 

COTTON  AS  A  BAROMETER  OF  BUSINESS 385 

WHY  COTTON  is  A  BETTER  BAROMETER  THAN  PIG  IRON 397 

INDICATIONS  OF  APPROACHING  DEPRESSION 402 

INDICATIONS  POINTING  TO  THE  END  OF  DEPRESSIONS 407 

SUPPLY  AND  DEMAND 413 

PROFITEERING 418 

REPORT  OF  THE  PRESIDENT'S  CONFERENCE 425 

CONCLUSION    436 

BIBLIOGRAPHY  .  447 


INTRODUCTION 

Of  our  one  hundred  and  thirty  years  as  a  nation  thirty- 
three  years  have  been  wasted  in  disastrous  and  ruinous  de- 
pression and  perhaps  an  equal  number  have  been  marked 
by  over-spending,  extravagance  and  waste  of  wealth.  The 
remainder  have  been  years  of  normalcy. 

Depressions  and  trade  upheavals  have  swayed  the  course 
of  humanity  in  its  struggles  equally  as  much  as  has  war. 

The  progress  of  the  human  race  is  marked  by  periods  of 
economic  distress  when  want,  poverty,  and  unemployment 
set  the  minds  of  men  to  thinking.  These  were  periods  when 
convictions  were  sharply  and  vigorously  stated  and  men,  by 
force  of  extremity,  took  their  complaint  to  the  fountain  head. 
Great  changes  in  government,  leading  to  the  emancipation 
of  mankind  and  to  the  democracy  which  exists  today  were 
the  result  of  movements  that  grew  out  of  economic  adver- 
sity. 

Were  it  not  for  the  demands  of  commerce  we  should  prob- 
ably still  be  in  a  state  of  feudalism.  When  the  economic 
status  of  the  people  became  debased  to  such  an  extent  that  it 
became  unbearable,  they  demanded  reform  and  a  degree  of 
prosperity,  with  the  alternative  of  revolt. 

When  bread  is  scarce,  and  his  pillow  a  stone  and  his  fam- 
ily in  need,  man  seeks  to  find  the  cause.  In  times  of  adver- 
sity he  studies  hard  to  find  a  philosophy  in  life.  He  ponders 
dubiously  over  the  promise  of  the  Psalmist,  "The  Lord  is  my 
Shepherd,  I  shall  not  want." 

Histories  relating  the  glories  of  nations  that  have  risen  to 
power  are  classic.  They  rise  to  lofty  heights ;  they  light  the 
paths  of  time.  But  when  they  come  to  the  gloomy  vales  of 
economic  decline  and  depression,  where  ten  pages  have  been 
given  to  glory  a  line  is  sufficient  to  describe  the  distress  that 
followed  and  the  lessons  to  be  drawn. 

Education  along  this  line  is  of  the  utmost  importance.  It 
should  be  started  with  the  young  business  men,  or  even  in 


8  HISTORY   OF   BUSINESS   DEPRESSIONS 

the  colleges  from  whence  men  go  out  into  the  trades  and 
professions.  Depressions  affect  our  well-being  and  our 
money.  (And  our  money  is  close  to  our  hearts — regrettable 
though  this  admission  may  be — because  we  are  horn  with  a 
degree  of  selfishness.)  But  our  material  prosperity  goes 
hand  in  hand  with  our  political  and  our  spiritual  arf/vance- 
ment  and  our  leaders  in  education  and  business  have  not 
given  this  subject  the  thought  and  study  it  deserves.  We 
have  for  our  edification  an  abundance  of  literature  regarding 
the  intrigues  of  courtiers,  the  reigns  of  kings,  the  feats  of 
statesmen  and  the  glory  of  war  heroes,  but  back  of  it  all,  in 
this  day  as  in  those  that  are  past,  some  one  must  foot  the 
bill.  So  a  study  of  the  economic  side  is  equally  important. 
Our  professional  men  like  to  ask  fat  fees,  our  officials  high 
salaries,  and  our  workers  big  wages,  yet  little  does  it  ever 
occur  to  them  to  consider  who  ultimately  assumes  the  bur- 
den. Then,  when  these  periods  of  depression  come  on  there 
arise  waves  of  discontent,  bringing  disruptions  and  serious 
setbacks  in  the  progress  of  our  lives;  all  because  our  eco- 
nomic affairs  have  not  been  well  regulated.  Men  stare  at 
each  other  helplessly,  ignorant  of  the  why  and  the  where- 
fore, realizing  too  late  that  their  troubles  could  have  been 
largely  avoided.  It  would  take  a  thousand  books  to  point 
out  what  powerful  factors  these  business  cycles  have  been 
in  determining  men's  actions,  to  illustrate  how  different 
things  are  from  what  they  might  have  been.  Looking  back, 
every  individual  can  see  ambitions  thwarted,  years  of  work 
gone  for  naught,  the  course  of  life  halted  or  redirected  be- 
cause of  the  unexpected  ebb  or  flow  of  the  business  tide. 

After  having  passed  through  the  second  Galveston  storm 
in  1915,  the  writer  was  certain  that  tropical  hurricanes,  at- 
tended by  tidal  waves,  leaving  ruin,  desolation  and  death  in 
their  wake,  were  the  worst  things  God  ever  put  on  earth. 
Others  of  us  who  lingered  in  the  valley  of  the  shadow  in 
the  dreaded  influenza  epidemic  which  swept  the  world  dur- 
ing the  great  war  are  ready  to  believe  that  plagues  are  the 
worst  of  earth's  calamities.  But  thousands  will  agree  that 


HISTORY  OF  BUSINESS  DEPRESSIONS  9 

the  thing  which  causes  the  greatest  sum  total  of  suffering  is 
the  series  of  panics  and  depressions  that  sweep  over  the 
world  now  and  again,  touching  all  civilization  with  a  with- 
ering hand,  leaving  loss,  misery,  ruin  and  suicide  in  their 
wake.  Afteir  a  struggle  of  years  many  find  their  invest- 
ments -"jped  out.  Those  who  have  saved  and  secured  a  start 
along  the  upward  path  find  stalking  them  the  gaunt  spectre 
of  failure. 

An  acquaintance  had  invested  judiciously,  as  investments 
go,  his  charities  were  many  and  generous,  and  he  held  a  re- 
spected place  in  society  and  industry.  The  depression  of 
1920  brought  reverses  entirely  through  no  fault  of  his,  and 
the  shock,  being  unbearable,  he  preferred  to  face  a  gun  in 
his  own  hand  rather  than  the  future.  Another  friend  of 
large  means  and  high  standing  was  carried  to  an  asylum, 
his  keen  intellect  and  fine  ability  destroyed  forever.  Others 
fall  from  the  level  of  comfort  to  poverty;  still  others  face 
worry  and  misery  and  want  from  unemployment.  These 
cycles  not  only  bring  their  loss  of  accumulated  wealth,  but 
a  harvest  of  thwarted  human  energy  as  well.  They  are  un- 
forgetable  periods  in  the  lives  of  us  all. 

We  are  erecting  barriers  against  the  storm  and  establish- 
ing posts  of  warning  in  its  path,  and  science  promises  to 
eliminate  the  germs  of  pestilence.  Likewise,  then,  human 
brains  and  all  the  resources  of  mankind  must  be  mustered 
to  solve  the  problem  of  the  ever-recurring  crises  and  de- 
pressions in  our  economic  life.  Some  say  it  cannot  be  done ; 
others  insist  that  it  can.  In  my  humble  opinion,  based  on 
a  close  study  of  the  question,  we  shall  some  day  look  back 
on  depressions  in  the  same  spirit  of  tolerant  pity  that  we 
now  look  back  upon  the  famines  of  the  Middle  Ages. 

The  business  organism  is  much  more  complicated  than 
the  delicate  machinery  of  a  watch  and  is  exposed  to  an  in- 
finite variety  of  perils  and  accidents.  But  these  are  nearly 
always  preceded  by  symptoms  which  do  not  escape  the  eye 
and  ear  of  the  business  man  whose  judgment  has  been  sharp- 
ened by  scientific  study  as  well  as  by  experience.  It  has 


10  HISTORY   OF   BUSINESS   DEPRESSIONS 

been  said  that  the  past  is  the  only  guide  by  which  to  judge 
the  future,  and  while  business  may  not  be  so  guided  by  pre- 
cedent as  is  diplomacy,  yet  a  great  many  pitfalls  may  be 
avoided  as  we  travel  along  the  rocky  road  of  industry  if  we 
would  but  heed  the  sign  posts  of  preceding  events.  We 
profit  from  our  own  mistakes  as  a  rule,  so  why  should  we 
not  profit  from  the  mistakes  of  our  forebears?  As  a  business 
man  I  can  testify  that  I  could  have  made  and  saved  a  great 
deal  more  money  had  I  previously  the  knowledge  that  the 
research  entailed  in  getting  together  these  chapters  has 
brought  me. 

It  is  not  only  important  but  necessary  these  days  for  a 
business  man  to  know  when  to  act.  His  judgment  must  be 
keen  in  knowing  when  his  opportunity  presents  itself  and  be 
quick  to  take  advantage  of  that  opportunity.  Likewise,  I 
believe  we  must  admit,  by  this  time,  that  it  is  equally  as  im- 
portant to  know  when  not  to  act,  when  to  lay  in  port  until 
the  storm  passes  by.  In  the  old  sailing  days  men  used  to 
go  out  when  the  skies  were  clear;  now  we  go  when  the 
barometer  and  wireless  tell  us  it  is  safe  to  go.  In  business 
we  have  fairly  well  recognized  barometers,  if  we  but  heed 
them,  and  our  wireless  is  the  signals  we  get  from  the  pages 
of  history. 

We  have  a  peculiar  Anglo-Saxon  trait — that  of  love  of 
precedent.  It  is  a  proverb  among  us  that  "history  repeats 
itself."  And  it  is  notable  among  us  that  historical  inci- 
dents have  more  of  a  hold  upon  our  minds  than  any  theoreti- 
cal arguments.  No  physician  worthy  of  the  name  will  pre- 
scribe without  some  knowledge,  great  or  imperfect,  of  the 
history  of  his  patient's  ailment ;  no  worthy  lawyer  will  ren- 
der an  opinion  on  a  client's  case  until  he  has  a  history  of 
the  case.  In  business,  then,  if  we  expect  to  diagnose  and 
cure  the  ailments  that  have  afflicted  us  periodically  since 
the  beginning  of  time,  we  must  have  before  us  essentially  a 
history  of  what  has  passed. 

Nations  will  stand  up  against  a  foe;  fight  pestilence; 
master  famine;  overcome  fire  and  earthquake;  face  catas- 


HISTORY  OF  BUSINESS  DEPRESSIONS  11 

trophe  of  all  kinds  with  stoic  calmness,  and  then  lose  their 
heads  entirely  in  an  industrial  crisis.  Then,  if  ever,  the 
cowardliness  of  human  nature  will  assert  itself.  Why  is 
this  ?  This  is  a  question  that  there  would  be  many  answers 
to,  but  most  likely  it  is  because  of  lack  of  leadership. 

Cities  of  all  nations  are  dotted  with  statues  in  memory  of 
heroes  who  led  them  in  military  victories,  but  few  there  are 
erected  to  the  captains  of  industry  who  led  them  out  of  in- 
dustrial chaos. 

Depression  is  a  disease  of  the  nation,  the  body  politic, 
and  on  many  occasions  in  our  history  the  use  of  stimulants 
has  been  required  to  incite  the  heart  action. 

Times  of  depression  tax  the  resourcefulness  of  men.  They 
reveal  the  stuff  that  is  in  them.  If  in  times  of  prosperity 
they  have  lived  beyond  their  means  and  mismanaged  their 
business,  or  used  bad  judgment  in  expanding,  they  will  fail 
when  depression  strikes.  It  is  recognized  among  mercantile 
agencies  that  a  firm  or  corporation  that  can  go  through  a 
serious  depression  and  maintain  its  credit  is  built  on  a 
strong  foundation.  A  great  injustice  lies  in  the  fact  that 
the  innocent  often  suffer  for  the  sins  of  the  guilty.  Work- 
ers and  investors  alike  suffer  unemployment  and  loss 
through  no  fault  of  theirs. 

The  present  age  will  be  known  in  history  as  the  age  of 
commerce.  We  have  accomplished  much  in  the  arts  and 
sciences.  Our  inventions  are  beyond  the  dreams  of  former 
generations,  and  yet  it  cannot  be  said  that  our  commerce  is 
on  an  entirely  scientific  basis.  Only  in  recent  years  have  we 
reached  anything  like  a  scientific  financial  system,  and  even 
yet  some  of  the  leading  countries  of  the  world  are  backward 
in  this  respect.  We  cannot  boast  of  science  in  our  business 
until  we  have  overcome  the  useless  uncertainties  of  business 
depression.  Men  still  say  that  trade  cycles  always  have 
come  and  always  will,  but  students  of  the  question  agree 
that  it  is  easily  possible  through  proper  education  to  build 
a  fairly  even  graded  road-bed  of  commerce,  cutting  down 


12  HISTORY  OF   BUSINESS   DEPRESSIONS 

the  high  spots  and  bridging  the  valleys.     In  this  there  is  a 
great  field  for  thought  and  accomplishment. 

It  is  not  the  object  of  this  work  to  be  an  essay  or  a  treatise 
on  panics,  crises  and  depressions.  There  are  a  number  of 
works  that  treat  the  subject  from  a  theoretical  standpoint. 
It  is  aimed  to  give  the  historical  facts  and  incidents  of  pre- 
ceding disturbances  and  then  let  the  reader  theorize  for 
himself.  A  few  chapters  are  devoted  to  my  own  deductions, 
particularly  on  recent  incidents,  arrived  at  from  a  close 
study  of  the  question  in  practical  business  life  over  a  period 
of  years. 

More  space  has  been  given  to  the  business  depressions  of 
recent  years  because  of  their  proximity  to  our  time  and  their 
closer  relationship  to  the  present  existing  conditions.  In 
the  text  credit  is  given  where  authors  and  periodicals  are 
quoted  and,  as  the  chapters  are  classified  according  to  pe- 
riods, it  will  be  easy  to  refer  to  the  works  of  the  authorities 
given  in  the  bibliography.  To  cover  all  the  details  of  some 
of  the  causes  of  our  crises  would,  in  many  instances,  make 
books  in  themselves,  and  would  be  more  than  any  mind  could 
conveniently  grasp.  I  have  aimed  to  portray  here  only  such 
historical  facts  and  matter  as  will  be  useful  and  informative 
to  the  ordinary  business  man  and  investor  of  the  present 
day,  and  have  studiously  avoided  overburdening  it  with 
theory  or  too  large  an  array  of  statistical  details  which  are 
irrelevant  to  the  subject  as  a  whole.  The  money  question, 
paper  currency  and  bimetalism  enter  largely  into  the  history 
of  depressions,  particularly  those  of  the  nineteenth  century. 
This  question  can  be  studied  by  those  who  desire  to  do  so 
from  various  works  on  the  subject,  some  of  which  are  given 
in  the  bibliography.  Several  books  may  also  be  had  on  the 
question  of  unemployment  which  touch  on  the  subject  of 
depression.  The  general  question  of  industrial  and  agri- 
cultural economics  is  also  covered  by  various  authors  who 
find  occasion  to  review  briefly  some  of  the  setbacks  suffered 
from  depressions. 


CHAPTER  I 
THE  VICISSITUDES  OF  ANCIENT  COMMERCE 

The  history  of  ancient  countries  with  the  rising  and  falling 
tides  of  their  commerce  can  have  little  bearing  on  industry 
of  today.  Commerce  of  the  ancient  world  died  out  and  little 
is  left  of  its  traces  to  profit  the  modern  world,  with  the  im- 
portant exception,  perhaps,  of  the  old  Roman  Law.  Yet  in 
the  precepts  of  antiquity  we  may  find  substance  for  thought 
and  utility. 

In  all  the  struggle  of  humanity  up  the  steep  mountain  of 
progress  commercial  distress  has  been  one  of  the  greatest  ob- 
stacles to  survive.  Thrones  of  kings  have  tottered  during 
the  numerous  periods  of  poverty  and  distress  which  brought 
with  them  the  spectre  of  revolution  and  menaced  existing 
governments.  On  the  other  hand,  the  Ancient  Ages  have 
left  us  stories  of  their  passing  glory,  peace,  contentment 
and  prosperity.  Those  must  have  been  days  of  wealth  in 
abundance,  "when  Greece  held  the  torch  of  civilization  and 
Rome,  the  magnificent,  was  built  as  the  capital  of  the  world 
empire." 

In  the  27th  and  28th  chapters  of  Ezekiel  we  are  told  in 
glowing  language  of  the  prosperity  of  Tyre  and  then  of  its 
sudden  ruin  because  of  its  loss  of  wealth. 

The  romantic  story  of  the  decline  of  nations  and  com- 
merce is  a  history  in  itself.  One  country  after  another 
has  obtained  the  lead  and  lost  it.  Where  are  the  nations 
of  history?  Of  the  six  that  belonged  to  the  ancient  regime 
only  three  are  of  any  significance  now;  of  the  nine  origi- 
nating in  the  Middle  Ages  only  three,  again,  remain.  Will 
our  turn  come? 

Where  is  Phoenicia,  Carthage,  Arabia,  Babylonia?  Where 
is  Chaldea,  Etruria,  Media,  Macedonia?  Where  is  ancient 
Egypt,  Persia,  Greece,  Rome  ?  Where  is  the  Venice,  'Hol- 
land, Spain,  Portugal  of  the  Middle  Ages  ?  Where  and  why  ? 

Theorists  have  a  tendency  to  attribute  the  decline  of  na« 
tions  in  various  periods  to  the  commercial  spirit.  Probably 


14  HISTORY   OF   BUSINESS   DEPRESSIONS 

they  mean  the  wrong  use  of  wealth,  because  business  can  be 
as  clean  and  elevating  as  any  other  calling  if  properly  con- 
ducted. It  has  been  demonstrated,  however,  that  no  nation 
can  maintain  its  greatness  or  escape  decay  if  it  becomes 
poisoned  by  frivolity  and  vice. 

In  ancient  times  civilization  scarcely  touched  the  wild, 
barbarous  people  of  Germany,  Gaul  and  Britain,  whose 
inhabitants  lived  in  a  state  of  rude  poverty,  while  in  such 
nations  as  Arabia,  Egypt  and  Assyria,  the  people  built 
splendid  palaces,  developed  the  arts  and  lived  amidst 
marvels  of  luxury.  Today  conditions  are  practically  re- 
versed, and  who  would  dare  say  that  it  was  not  brought 
about  by  the  rise  and  fall  of  commerce. 

Not  always  did  these  ancient  nations  and  cities  decline 
through  conquests,  as  is  the  usual  supposition.  Some  died 
without  the  drawing  of  a  sword.  As  an  instance,  the  State 
of  Venice  lost  her  supremacy  through  an  old-fashioned  panic 
and  trade  depression  brought  on  by  the  discovery  of  a  new 
route  to  India. 

The  ignorance  and  suspicions  of  men  in  the  early  times 
were  the  greatest  hindrances  to  the  rise  of  commerce,  as 
they  are  still  in  backward  portions  of  the  world.  In  times 
of  depression  we  still  see  the  outcropping  of  the  distrust 
of  our  antecedents  of  the  Stone  Age  when  we  become  fright- 
ened and  suspicious,  or  over-cautious,  often  delaying  the 
emergence  from  depression  to  normalcy. 

What  became  of  the  mighty  commerce  of  those  ancient 
nations  which  rose  to  power  and  glory  we  know  not.  The 
cycles  of  trade  can  be  traced  back  to  biblical  times,  when 
the  Good  Book  refers  to  Joseph  with  his  seven  fat  years 
and  his  seven  lean  years.  Demetrius,  the  silversmith, 
called  on  the  Ephesians  to  oppose  the  Apostle  Paul  because 
his  teachings  were  bringing  distress  to  the  industries  which 
made  shrines  for  Diana. 

Most  writers  give  Greece  credit  for  starting  the  coinage 
of  money,  but  according  to  Genesis  (Ch.  17)  "Abraham  had 


HISTORY   OF   BUSINESS   DEPRESSIONS  15 

flocks  and  herds,  and  silver  and  gold,  and  men-servants  and 
maid-servants,  and  oxen  and  asses."  And  is  it  not  recorded 
that  Abimelech  gave  to  Abraham  a  thousand  pieces  of 
silver,  besides  cattle  and  slaves? 

The  Assyrians,  6000  years  B.  C.,  had  made  quite  an  ad- 
vance in  civilization.  They  engaged  in  trade  and  commerce 
and  some  historians  say  they  had  banks  similar  to  those  of 
the  present  day.  Disorganization,  and  then  anarchy,  came 
and  the  Persians  obtained  the  ascendancy.  Ancient  Baby- 
lon 3000  years  B.  C.  under  a  Semitic  people,  supposed  to  be 
the  original  Jewish  race,  grew  to  great  importance  as  a 
commercial  nation.  The  Babylonians  are  described  as 
"greedy  of  gain,  litigious  and  almost  exclusively  absorbed 
by  material  concerns." 

"It  was  only  when  the  Europeans  found  a  new  path  to 
India  across  the  ocean,  and  converted  the  great  commerce 
of  the  world  from  a  land  trade  to  a  sea  trade,"  says  Heeren, 
"that  the  royal  city  on  the  banks  of  the  Tigris  and  Euphrates 
began  to  decline.  Then,  deprived  of  its  commerce,  it  fell 
a  victim  to  the  two-fold  oppression  of  anarchy  and  despot- 
ism, and  sunk  to  its  original  state — a  stinking  morass,  and 
a  barren  steppe." 

Following  Babylon  the  Phoenicians  developed  a  great 
commerce  about  1500  B.  C.  Then  the  Heroic  Age  of  Greece, 
about  1000  B.  C.,  brought  that  country  to  commercial 
supremacy.  Later  came  the  great  Roman  Empire  and 
domination  of  the  world,  and  with  it  the  greatest  and  long- 
est period  of  peace  and  prosperity  the  world  has  ever  known. 
The  Romans  were  great  organizers  and  skilled  adminis- 
trators. Day  says:  "They  earned  all  they  received  by  one 
great  contribution,  'pax  Romans,'  Roman  peace,  which 
continued  almost  unbroken  for  centuries,  and  which  fur- 
nished an  opportunity  for  commercial  development  before 
unknown."  Then  under  the  Caesars  with  its  corruption 
came  decline  in  commerce,  and  the  sceptre  of  Roman 
authority  passed  from  the  western  world. 


16  HISTORY  OF  BUSINESS  DEPRESSIONS 

From  the  scraps  that  we  have  been  able  to  sift  from  the 
history  of  China  it  is  apparent  that  that  ancient  and  inter- 
esting people  had  periods  of  great  trade  decline  and  depres- 
sion from  causes  that  we  are  unable  now  to  discover. 
Otherwise,  how  could  she  allow  such  inventions  as  printing 
and  the  mariner's  compass  to  be  forgotten  and  obliterated, 
once  they  had  been  discovered  and  used. 

In  its  day  ancient  Egypt  at  times  basked  in  the  sunshine 
of  luxury,  and  in  periods  of  depression  she  put  armies  of 
unemployed  to  work  and  fed  them  while  they  built  the 
pyramids.  We  know  that  the  history  of  ancient  Egypt  was 
marked  by  four  declines  and  revivals,  and  at  no  time  during 
this  period  was  she  conquered,  so  in  those  periods,  when  the 
records  are  almost  entirely  obliterated,  there  must  have  been 
widespread  economic  distress. 

With  the  rise  and  decline  of  commerce  the  center  of  civili- 
zation shifted  from  point  to  point,  from  Egypt  to  Phoenicia, 
from  Phoenicia  and  Carthage  to  Greece  and  Rome  and  then 
from  Constantinople  to  Italy  and  Spain,  from  Spain  to 
Holland,  and  thence  to  France  and  England. 

It  was  the  agrarian  depression  that  marked  the  begin- 
ning of  the  decline  of  Greece  and  a  similar  agrarian  depres- 
sion brought  about  the  establishment  of  the  republic  in 
Rome.  "Throughout  all  the  ages  those  countries  in  which 
trade  flourished  were  accounted  happy  and  left  glorious 
history  for  coming  generations  to  read  and  follow.  While 
those  in  which  commerce  drooped  their  oblivion  was  com- 
plete and  only  a  phantom  shows  where  they  came  into 
history  and  passed  out  again." 

As  to  ancient  Greece,  the  poems  of  Homer  sing  mostly 
of  her  glory  and  we  look  to  Aristotle  for  the  history  of 
her  trade.  In  the  seventh  century  B.  C.,  under  the  archons, 
Greece  suffered  great  distress.  The  nobles  alone  were  in 
possession  of  the  government  through  which  they  ruled 
trade  and  commerce.  Great  masses  of  the  poor  peasants 
struggled  with  little  hope  against  the  bad  economic  condi- 
tions. Circumstances  seemed  to  have  been  particularly  severe 


HISTORY  OF  BUSINESS   DEPRESSIONS  17 

in  Attica.  The  soil  of  the  country  was  thin  and  unproductive, 
unable  to  support  more  than  a  moderate  population,  and 
any  increase  in  the  number  of  inhabitants  led  inevitably 
to  an  increase  of  poverty.  The  evil  might  have  been  met 
by  emigration,  but  at  this  date  the  shipping  industry  was 
depressed  and  the  people  were  too  poor  to  even  seek  out  new 
homes  beyond  the  sea.  There  was  no  capital  for  the  devel- 
opment of  trade  except  the  little  that  could  be  borrowed  at 
high  rates  of  interest  and  under  the  most  unfavorable  con- 
ditions. The  laws  respecting  debtors  were  very  cruel, 
designed  to  protect  the  rich  against  the  poor.  The  people 
seemed  to  have  lost  their  insight  into  mercantile  transac- 
tions and  there  was  no  knowledge  of  the  cause  of  the 
growth  of  wealth.  They  were  in  the  same  state  of  mind 
in  those  ancient  days  that  we  have  a  tendency  to  pass 
through  in  the  depressions  of  our  times.  Instead  of  seek- 
ing a  way  to  better  conditions  through  improved  trade  and 
greater  production,  they  were  cringing  with  fear,  hoarding 
what  little  wealth  there  was  and  helping  to  squeeze  tighter 
the  grip  that  held  them.  A  great  mass  of  people  that 
should  have  been  producing  wealth  became  debtors  and 
were  placed  by  law  in  a  very  degraded  position.  At  this 
time  Cypselus,  a  member  of  the  great  oligarchical  family  at 
Corinth,  threw  his  lot  with  the  masses,  and  by  his  energy 
and  insight  organized  trade  and  agriculture  and  led  the 
people  out  of  chaos. 

The  great  depression  of  594  B.  C.,  when  Solon  came 
forward  in  a  time  of  public  distress  and  rescued  the 
Athenians  from  a  most  serious  situation,  marks  an  epoch 
in  the  economic  history  of  ancient  times.  Debt  and  poverty 
oppressed  the  poor  citizens,  and  melancholy,  indeed,  is  the 
picture  which  historians  draw  of  the  social  state  of  Athens 
at  that  time.  Among  the  higher  classes  there  prevailed  a 
spirit  of  selfish  greed  whose  greatest  aim  seemed  to  be  to 
oppress  the  poor  and  wring  from  them  their  last  farthing. 
So  terrible  was  the  depression  that  Solon  perceived  great 
dangers.  People  were  ready  to  do  anything  to  better  their 


18  HISTORY  OF  BUSINESS  DEPRESSIONS 

condition,  and  powerful  neighbors  were  getting  ready  to 
take  advantage  of  the  situation  to  attack  Athens.  Solon 
by  birth  belonged  to  the  aristocracy,  but  his  fortunes  had 
thrown  him  among  merchants  and  there  he  gained  knowl- 
edge of  the  causes,  as  well  as  the  needed  remedies  for  the 
distress.  Solon  averted  the  impending  crisis.  "His  first 
measure  was  the  famous  Seisachtheia.  Every  citizen  who 
had  been  sold  into  slavery,  at  home  or  abroad,  was  restored 
to  liberty;  all  debts  secured  upon  the  person  or  landed 
property  of  the  debtors  were  cancelled,  and  for  the  future 
no  one  was  allowed  to  lend  money  on  the  security  of  the 
debtor's  person.  Some  authorities,  as  for  instance  Andre- 
tion  (Fourth  Century  B.  C.),  are  of  the  opinion  that  the 
Seisachtheia  was  no  more  than  a  moderation  of  the  rate 
of  interest,  but  the  majority  assert  that  it  was  a  cancelling 
of  all  contracts  alike,  and  with  this  view  Solon's  words 
agree."  Solon's  words  are:  "In  the  day  of  vengeance, 
dark  Earth,  mightest  mother  of  the  gods  of  Olympus,  will 
be  my  surest  witness  of  this,  from  whom  I  removed  pillars 
planted  in  many  places,  and  whom  I  freed  from  her  bonds. 
Many  citizens,  who  had  been  sold  into  slavery  under  the 
law  against  it,  I  brought  back  to  Athens,  their  home; 
some  of  them  spoke  Attic  no  longer,  their  speech  being 
changed  in  their  many  wanderings.  Others  who  had 
learned  the  habits  of  slaves  at  home,  and  trembled  before 
a  master,  I  made  to  be  free  men.  All  this  I  accomplished 
by  authority,  uniting  force  with  justice,  and  I  fulfilled  my 
promise."  From  this  it  is  clear  that  by  some  means  debtor- 
slaves  were  restored  to  liberty,  and  lands  burdened  with 
debt  were  relieved  of  the  incumbrance.  At  the  same  time 
Solon  made  a  change  in  the  coinage,  introducing  into  Attica 
the  standard  known  as  the  Euboeic  in  place  of  the  old 
Attic  or  Aeginetan.  From  the  remedies  applied  by  Solon,  it 
is  easy  to  see  that  the  cultivating  peasantry  of  Athens  had 
succumbed  before  the  difficulties  of  this  economic  revolu- 
tion. "Even  under  the  natural  economy,  which  may  have 
existed  in  the  time  of  Hesiod,  the  farmer's  lot  was  hard; 


HISTORY  OF  BUSINESS  DEPRESSIONS  19 

but  the  pressure  of  the  demand  of  moneyed  men  rendered 
it  intolerable.  Solon's  celebrated  legislation  was  intended 
to  relieve  the  poor  citizens,  and  it  was  directed  against  the 
money-lenders.  It  cancelled  existing  debts,  and  in  all 
probability  may  have  appealed  to  the  common  sense  of 
justice.  If  a  large  amount  had  been  paid  as  interest  there 
was  no  grave  injustice  in  striking  off  the  principal — the 
money-lenders  may  have  already  received  100  per  cent,  on 
what  they  advanced — while  it  was  now  made  impossible  for 
them  to  lend  on  the  security  of  the  citizen's  person." 

It  is  a  mark  in  history  that  the  law  enacted  at  that  time 
by  Solon  has  been  re-enacted  almost  exactly  by  different 
nations  on  up  to  modern  times  in  periods  of  economic 
depression. 

Pericles,  in  endeavoring  to  find  profitable  employment 
for  the  people,  deliberately  turned  their  energies  to  unpro- 
ductive public  works.  But  he  took  the  wrong  course. 
While  this  public  work  temporarily  relieved  the  existing 
depression,  it  only  augmented  it  in  later  years.  "The 
magnificent  buildings  which  were  reared  under  his  direction 
absorbed  the  wealth  of  the  city,  without  developing  any 
natural  resources  or  trading  facilities  in  return.  The 
treasure  was  exhausted  once  for  all,  and  there  was  no 
means  of  replacing  it,  such  as  arises  with  capital  employed 
in  industry  or  trade — it  was  locked  up  in  forms  that  are 
artistically  superb,  but  economically  worthless." 

Thus  the  expenditure  of  enormous  wealth  in  erecting 
great  public  buildings  of  marvelous  beauty  had  the  same 
effect  on  the  economic  conditions  of  the  country  as  the  over- 
building of  railroads  rh'rl  in  Europe  and  America  in  the 
Nineteenth  Century.  When  money  became  scarce  and  eco- 
nomic distress  prevailed  it  was  then  that  kings  started  on 
expeditions  against  their  neighbors  to  gain  new  wealth  by 
war.  This  replenished  the  treasury  in  case  of  victory  and 
occupied  the  minds  of  the  populace.  The  kings  had  noth- 
ing to  do;  when  poverty  reigned  the  people  became  un- 
manageable and  their  thrones  were  shaken.  Under  such 


20  HISTORY   OF   BUSINESS   DEPRESSIONS 

conditions  there  would  be  trouble  anyhow  and  by  going  to 
war  there  was  half  a  chance. 

In  ancient  Greece  bankers  were  called  "table  merchants" 
because  they  carried  on  their  operations  at  a  table  and  ex- 
ercised the  functions  of  money  changers  or  testers.  Alex- 
ander was  not  only  a  conqueror  but  a  traveler  and  colonizer. 
He  believed  in  trade,  and  wherever  he  ruled  the  trade  of 
Greece  followed. 

In  one  instance,  at  least,  we  are  possessed  of  the  direct 
cause  of  decline  and  that  is  the  Island  of  Crete,  which  for 
a  considerable  period  had  an  extensive  commerce  and  thriv- 
ing cities,  but  it  too  fell  into  decay.  No  doubt  because  of 
commercial  corruption,  since  a  proverb  for  centuries  after- 
ward asserted  "Cretains  were  always  liars." 

When  we  make  a  hasty  survey  of  the  Roman  Empire  to 
find  the  symptoms  of  decay  there  is  brought  to  light  as  the 
outstanding  feature  industrial  stagnation  and  commercial 
ruin.  The  year  33  A.  D.  was  full  of  events  in  the  ancient 
world.  It  marked  two  disturbances  as  the  outgrowth  of 
the  mob  spirit.  The  first  was  in  the  remote  province  of 
Judea,  where  one  Christus  was  tried  before  Pontius  Pilate, 
was  crucified,  dead  and  buried.  The  other  event  was  the 
great  Roman  panic  which  shook  the  empire  from  end  to 
end.  The  consternation  accompanying  the  latter  died 
down  and  it  was  soon  forgotten,  but  the  murmurings  of  the 
former  swept  down  the  centuries  until,  bursting  into  flames, 
it  enveloped  the  world. 

A  description  of  the  panic  reads  like  one  of  our  own 
times :  The  important  firm  of  Seuthes  &  Son,  of  Alexandria, 
was  facing  difficulties  because  of  the  loss  of  three  richly 
laden  spice  ships  in  a  Red  Sea  storm,  followed  by  a  fall  in 
the  value  of  ostrich  feathers  and  ivory.  About  the  same 
time  the  great  house  of  Malchus  &  Co.,  of  Tyre,  with 
branches  at  Antioch  and  Ephesus,  suddenly  became  bank- 
rupt as  a  result  of  a  strike  among  their  Phoenician  work- 
men and  the  embezzlements  of  a  f  reedman  manager.  These 
failures  affected  the  Roman  banking  house,  Quintus  Max- 


HISTORY  OF  BUSINESS   DEPRESSIONS  21 

imus  and  Lucius  Vibo.  A  run  commenced  on  their  bank 
and  spread  to  other  banking  houses  that  were  said  to  be 
involved,  particularly  the  Brothers  Pittius.  The  Via  Sacra 
was  the  Wall  Street  of  Rome,  and  this  thoroughfare  was 
teeming  with  excited  merchants.  These  two  firms  looked  to 
other  bankers  for  aid,  the  same  as  is  done  in  modern  days, 
but  unfortunately  at  this  time  an  outbreak  had  occurred 
among  the  semi-civilized  people  of  North  Gaul,  where 
a  great  deal  of  Roman  capital  had  been  invested,  and  a 
moratorium  had  been  declared  by  the  government  on  ac- 
count of  the  disturbed  conditions.  Other  bankers,  fearing 
the  suspended  conditions,  refused  to  aid  the  first  two  houses 
and  this  augmented  the  crisis. 

Money  was  tight  for  another  reason:  agriculture  had 
been  on  a  decline  for  some  years  and  Tiberius  had  pro- 
claimed that  one-third  of  every  senator's  fortune  must  be 
invested  in  lands  within  the  province  of  Italy  in  order  to 
recoup  their  agricultural  production. 

Publius  Spinther,  a  wealthy  nobleman,  was  at  that  time 
obliged  to  raise  money  to  comply  with  the  order  and  had 
called  upon  his  bank,  Balbus  Ollius,  for  30,000,000  sesterces, 
which  he  had  deposited  with  them.  This  firm  immediately 
closed  their  doors  and  entered  bankruptcy  before  the  prae- 
tor. The  panic  was  fast  spreading  throughout  all  the  prov- 
ince of  Rome  and  the  civilized  world.  News  came  of  the 
failure  of  the  great  Corinthian  bank,  Leucippus'  Sons,  fol- 
lowed within  a  few  days  by  a  strong  banking  house  in  Car- 
thage. By  this  time  all  the  surviving  banks  on  the  Via 
Sacra  had  suspended  payment  to  the  depositors.  Two  banks 
in  Lyons  next  were  obliged  to  suspend ;  likewise,  another  in 
Byzantium.  From  all  provincial  towns  creditors  ran  to 
bankers  and  debtors  with  cries  of  keen  distress  only  to  be 
met  with  an  answer  of  failure  or  bankruptcy. 

The  legal  rate  of  interest  in  Rome  was  then  12  per  cent 
and  this  rose  beyond  bounds.  The  praetor's  court  was  filled 
with  creditors  demanding  the  auctioning  of  the  debtors' 
property  and  slaves ;  valuable  villas  were  sold  for  trifles,  and 


22  HISTORY  OF   BUSINESS  DEPRESSIONS 

many  men  who  were  reputed  to  be  rich  and  of  large  fortune 
were  reduced  to  pauperism.  This  condition  existed  not 
only  in  Rome,  but  throughout  the  empire. 

Gracchus,  the  praetor,  who  saw  the  calamity  threatening 
the  very  foundation  of  all  the  commerce  and  industry  of  the 
empire,  dispatched  a  message  to  the  emperor,  Tiberius,  in 
his  villa  at  Capri.  The  merchants  waited  breathlessly  for 
four  days  until  the  courier  returned.  The  Senate  assem- 
bled quickly  while  a  vast  throng,  slaves  and  millionaires, 
elbow  to  elbow,  waited  in  the  forum  outside  for  tidings  of 
the  emperor's  action.  The  letter  was  read  to  the  Senate, 
then  to  the  forum  as  a  breath  of  relief  swept  over  the  wait- 
ing multitude. 

Tiberius  was  a  wise  ruler  and  solved  the  problem  with  his 
usual  good  sense.  He  suspended  temporarily  the  processes 
of  debt  and  distributed  100,000,000  sesterces  from  the  im- 
perial treasury  to  the  solvent  bankers  to  be  loaned  to  needy 
debtors  without  interest  for  three  years.  Following  this 
action  the  panic  in  Alexandria,  Carthage  and  Corinth 
quieted. 

And  so,  under  conditions  very  similar  to  those  existing  in 
the  Twentieth  Century,  business  of  the  Roman  Empire  re- 
sumed its  normal  aspect  and  the  Via  Sacra  went  its  normal 
way,  the  same  as  Wall  Street  has  done  on  many  an  occasion 
after  a  storm  has  passed.  How  similar  was  the  business 
of  the  world  in  that  year  of  the  crucifixion  of  Christ  to 
that  of  the  present  time ! 

Rome  under  Tiberius  had  probably  reached  the  highest 
state  of  civilization  that  it  had  known  until  the  dawn  of  the 
Nineteenth  Century.  Some  time  later  its  decay  set  in,  re- 
sulting from  just  such  panics  which  were  not  wisely  stopped 
and  allowed  to  run  their  course  of  ruin.  Then  followed 
medieval  times  with  its  feudalism.  The  world  was  centu- 
ries getting  back  to  the  height  of  Roman  civilization,  no 
doubt  because  of  the  disorganized  state  of  its  commerce. 

The  Romans  detested  labor  and  trade.  Yet  they  were 
gluttonous  for  wealth.  They  wanted  to  obtain  it,  however, 


HISTORY  OF   BUSINESS  DEPRESSIONS  23 

from  the  labor  of  slaves  and  from  conquest  rather  than  from 
business. 

Juvenal  wrote,  "With  us  the  most  reverend  majesty  is  that 
of  Riches,  even  though  Foul  Lucre !  Thou  dwellest  in  no  tem- 
ple, and  we  have  not  reared  altars  to  Coin,  as  we  have  for 
the  worship  of  Peace  and  Faith,  Victory,  Virtue  and  Con- 
cord." 

The  Romans  in  times  of  scarcity  offered  bounties  to  en- 
courage grain  importations  so  that  there  would  be  no  dis- 
tress on  the  part  of  the  people.  Apparently,  they  were  the 
first  to  use  the  system  of  drawing  on  the  reserves  of  the 
past  and  the  credit  of  the  future  to  alleviate  present  distress. 

As  told  by  Suet :  "Once  at  the  time  of  a  great  failure  of 
crops,  when  it  was  difficult  to  provide  relief,  Augustus  or- 
dered expulsion  from  the  city  of  slaves  who  were  exposed  for 
sale,  of  schools  of  fencing-masters,  and  all  foreign  residents, 
except  physicians  and  teachers,  and,  above  all,  of  domestic 
slaves,  so  that  at  last  the  supply  of  corn  became  cheaper. 
The  landowners  of  Rome,  in  the  heigh-day  of  her  insolent 
adolescence,  had  denounced  both  the  commerce  and  the  arts 
as  the  business  of  slaves  or  freedmen." 

During  the  palmy  days  of  the  Roman  Republic,  known  as 
her  "Golden  Age,"  the  cultivation  of  the  soil  and  the  pur- 
suits of  industry  were  regarded  as  honorable  and  dignified. 
It  was  then  that  Cincinnatus  left  the  plow  to  answer  his 
country's  call.  This  age  also  gave  Cato,  Scipio  and  others 
of  her  great  statesmen  who  appreciated  the  value  of  com- 
merce and  industry  to  the  country. 

In  times  of  depression  the  Romans  built  the  great  roads 
(to  give  employment  to  the  people)  which  spread  over  the 
continent  of  Europe  and  India,  and  the  people  of  modern 
civilization  still  ride  over  those  Roman  roads.  The  decline 
of  Rome  is  an  interesting  study  in  economics.  It  started 
when  foreign  grain  undersold  the  Italian  product  and  these 
barbarians  were  forced  to  join  the  rabble  of  the  cities. 
When  Rome  no  longer  produced  she  became  pauperized, 
because  her  commerce  was  nil,  trade  was  degrading,  and 
when  there  were  no  more  countries  to  conquer  to  bring  her 


24  HISTORY  OF  BUSINESS  DEPRESSIONS 

wealth  there  was  nothing  but  decline  ahead.  As  the  years 
went  by  great  armies  of  unemployed  slaves  surged  over  the 
land ;  particularly  in  the  reign  of  Nero  they  became  threat- 
ening and  dangerous.  All  writers  agree  that  had  Rome  rec- 
ognized the  honor  of  trade  and  commerce  and  established  in- 
dustries, giving  employment  to  the  people,  she  may  to  this 
day  have  been  the  center  of  the  world's  civilization. 

The  general  impression  that  Rome  fell  because  of  sinful 
indulgence  is  to  some  extent  erroneous.  In  studying  her 
economic  history  it  will  be  found  that  a  decline  of  her  com- 
merce had  set  in,  which  undermined  her  financial  stability. 
This  was  due  to  many  causes,  principally  the  drain  of  pre- 
cious metals  to  the  East,  depriving  the  empire  of  much 
needed  currency. 

Thus  when  she  was  called  upon  to  defend  the  onslaught 
of  the  disorganized  barbarian  invaders  which  under  proper 
economic  conditions  would  have  been  no  match  for  her,  she 
fell  easy  prey  to  them.  It  is  said  that  wiser  capitalists 
unable  to  induce  the  authorities  to  take  steps  to  remedy  the 
depression  tied  their  money  in  a  napkin  and  buried  it  against 
the  day  of  abject  distress  that  was  sure  to  come. 

An  authority  says:  "If  a  credit  system  had  been 
evolved  to  take  the  place  of  metallic  currency,  Rome  might 
not  have  been  embarrassed  by  the  shortage  of  metal,  but  un- 
fortunately nothing  of  the  kind  was  done.  Another  cause  of 
bad  conditions  was  the  unprofitable  investment  by  the  gov- 
ernment of  much  of  the  capital  of  the  ancient  world.  A 
comparatively  large  share  of  the  surplus  wealth  of  the  an- 
cient world  flowed  to  the  imperial  city  in  the  form  of  taxes 
and  tribute.  Part  of  this  was  spent  on  the  army,  the  navy, 
the  roads,  the  improvement  of  harbors,  and  other  public 
works  which  increased  the  prosperity  of  the  empire.  A 
large  part  of  the  money,  however,  was  spent  on  temples, 
monuments,  public  baths,  and  the  like,  and  another  portion 
purchased  grain,  which  was  given  free  to  all  Roman  citizens 
who  wished  it.  All  such  investments  were  very  much  like 
burying  the  capital  of  the  empire,  as  far  as  business  was 
concerned.  The  grain  doles  were  especially  bad,  as  they 
served  to  keep  thousands  of  able-bodied  men  in  idleness  at 
the  expense  of  those  who  were  working." 


HISTORY  OF   BUSINESS   DEPRESSIONS  25 

In  those  times  men  who  held  public  office  were  expected  to 
contribute  to  the  maintenance  and  support  of  the  city.  As 
prosperity  declined  and  maintenance  became  increasingly 
difficult  the  offices  became  undesirable.  Then  for  once  in 
history  the  vorld  beheld  the  spectacle  of  men  fleeing  the 
country  rather  than  hold  public  office.  Woeful,  indeed,  are 
times  of  depression ! 

So  it  was  not  wealth  and  luxury  that  destroyed  Rome  and 
other  great  nations,  but  it  was  the  uncorrected  evils  which 
grew  up  with  wealth  and  unchecked  inclinations.  Suppose 
our  boom  periods  were  allowed  to  run  in  this  country  un- 
retarded,  who  cannot  imagine  but  that  it  would  lead  event- 
ually to  national  ruin?  In  that  respect  depressions  are  a 
blessing.  Those  of  our  history  may  have  acted  as  a  restrain- 
ing hand  against  national  disruption. 


CHAPTER  II 
TRADE  DECLINES  OF  THE  MIDDLE  AGES 

The  writer  on  economics  is  always  at  a  disadvantage.  He 
must  necessarily  preclude  that  majestic  portrayal  of  politi- 
cal events  by  which  he  might  add  the  flourish  of  beauty.  In 
my  subject,  particularly,  I  am  brought  to  dwell  only  upon 
the  palls  of  gloom  that  hung  like  darkened  clouds  over  the 
unfortunate  years  of  history. 

A  detailed  recitation  of  the  commercial  difficulties  im- 
posed upon  the  Middle  Ages  would  be  of  little  profit  here. 
Business  methods  in  those  days  were  so  absolutely  different 
from  those  of  today  that  scarcely  any  lesson  could  be  drawn 
from  them.  Undoubtedly  the  chief  causes  of  their  commer- 
cial setbacks  were  famine,  plagues  and  war,  which  swept  in- 
termittently over  all  countries.  The  severity  and  suffering 
brought  on  by  these  times  reduced  great  numbers  of  poor  to 
willing  slaves,  retarded  civilization  and  filled  the  world  with 
beggars. 

In  this  chapter  we  review  ten  centuries  of  time  wherein  a 
race  of  barbarians,  whose  origin  is  lost  in  antiquity,  overran 
the  proud  sovereignty  of  ancient  civilization,  prostituted  the 
fair  fields  of  Rome,  and  set  the  world  back  a  thousand  years. 
Only  in  spots  is  there  a  beam  of  sunlight  that  comes  scintil- 
lating through  the  clouds  of  these  centuries  of  darkness.  In 
this  span  of  time  a  short  period  of  economic  prosperity  was 
an  extreme  exception  rather  than  the  rule.  In  writing  an 
economic  history  of  that  period  one  would  have  to  touch  only 
the  extremely  few  high  spots  in  describing  the  short  periods 
of  peace  and  plenty.  The  reign  of  Charlemange  in  the 
Eighth  Century  was  one  of  these.  This  good  king  was  so- 
licitous for  the  well-being  of  his  people.  He  led  them  out  of 
a  long  depression,  reformed  the  coinage  of  money,  establish- 
ed commercial  enterprises  and  sought  to  enrich  his  kingdom 
by  trade  and  commerce. 

The  great  plague  of  542  A.  D.  ravaged  the  Western  world. 
It  carried  off  a  third  of  the  population  and  "was  not  the  least 


HISTORY  OF  BUSINESS  DEPRESSIONS  27 

of  the  causes  of  that  general  decay  which  is  found  in  the 
later  years  of  Justinian's  reign.  It  swept  away  tax-payers, 
brought  commerce  to  a  standstill." 

The  longest  depression  on  record  was  when  the  Hun  and 
Scythian  barbarians  overran  the  western  provinces  of  the 
Roman  Empire.  The  confusion  which  followed  so  great  a 
revolution  lasted  for  several  centuries.  The  towns  were 
deserted,  the  country  was  left  uncultivated  and  the  western 
provinces  of  Europe,  which  had  enjoyed  a  considerable  de- 
gree of  opulence  under  the  Roman  Empire,  sank  into  the 
lowest  state  of  poverty  and  barbarism.  During  the  contin- 
uance of  these  confusions  the  chiefs  and  principal  leaders  ac- 
quired, or  usurped  to  themselves  the  greater  part  of  the  land. 

The  next  longest  depression  lasted  through  the  hundred 
years  of  religious  wars,  which  kept  industrial  progress  at  a 
standstill  while  humanity  bled  for  the  sake  of  a  creed.  Me- 
diaeval times  passed  with  little  commerce  carried  on.  The 
lack  of  powerful  governments  caused  the  people  to  organize 
into  local  towns,  each  making  its  own  trade  tariffs  and  regu- 
lations and  existing  largely  to  itself.  Trading  was  crude 
and  meager  until  the  decay  of  feudalism  and  the  dawn  of 
the  modern  world.  The  rise  and  decline  of  commerce  is 
noted  in  the  case  of  various  cities  which  were  centers  of  the 
world's  finance  and  trade  in  the  Middle  Ages,  such  as  Venice, 
Genoa,  Bruges,  Antwerp  and  Amsterdam. 

"It  was  not  without  justice  that  the  ninth,  tenth,  and  elev- 
enth centuries  have  been  called  'the  Dark  Ages/  Liter- 
ature and  art  sank  back  to  the  level  from  which  Charles  the 
Great  had  for  a  time  raised  them ;  history  has  once  more  to 
be  reconstructed  from  the  scantiest  materials.  Architecture 
was  stagnant,  save  in  the  single  department  of  castle-build- 
ing—the one  development  that  these  centuries  produced." 
It  may  be  said  that  there  was  no  such  thing  as  a  steady  flow 
of  commerce.  Commercial  relations  between  the  tribes  of 
Central  Europe  were  spasmodic  and  the  domestic  trade  itself 
was  constantly  interrupted  by  tribal  wars.  It  was  a  period 
of  intense  gloom  and  depression,  and  the  economic  outlook 


28  HISTORY   OF   BUSINESS   DEPRESSIONS 

was  blacker  than  at  any  time  since  the  descent  of  the  bar- 
barians upon  Imperial  Rome. 

In  the  Eleventh  Century  wealth  was  scarcer  in  Europe 
than  it  had  been  since  the  fourth  century.  Conditions  were 
fered  a  decline  because  her  wealth  had  been  drained  through 
the  purchase  of  luxuries  from  the  Orient.  Conditions  were 
so  bad  in  Western  Europe  that  a  scandalous  traffic  was 
carried  on  in  supplying  the  slave  market  of  the  Saracens 
with  Christian  women.  In  England  it  was  very  common 
to  export  lower  classes  of  people  to  other  countries  as  slaves. 
All  the  Western  world  was  in  this  state  of  degradation  and 
poverty.  The  decline  of  this  period  affords  one  of  the  most 
interesting  studies  in  the  depths  to  which  the  human  race 
can  fall. 

"Not  to  be  killed,"  says  Stendhal,  "and  to  have  a  good 
sheepskin  coat  in  winter,  was,  for  many  people  in  the  tenth 
century,  the  height  of  felicity." 

Describing  regions  in  Italy  in  the  Thirteenth  Century,  for- 
merly parts  of  the  Roman  Empire,  Hallam  says,  "Among  the 
uninhabitable  plains  travellers  were  struck  with  the  ruins  of 
innumerable  castles  and  villages.  So  melancholy  and  ap- 
parently irresistible  a  decline  of  culture  among  the  popu- 
lation through  physical  causes,  which  seems  to  have  grad- 
ually overspread  a  large  portion  of  Italy,  has  not  been  ex- 
perienced in  any  other  part  of  Europe." 

In  these  times  it  was  the  common  religion  as  well  as  law 
that  every  commodity  had  a  just  and  equitable  price,  and  for 
one  to  charge  more  than  this  price  incurred  the  displeasure 
of  God  and  merited  the  punishment  of  man.  Mediaeval 
history  is  filled  with  examples  of  penalties  inflicted  upon 
tradesmen,  looked  down  upon  in  those  days,  who  attempted 
to  raise  prices  or  profiteer.  Christians  who  were  fortunate 
enough  to  have  it  were  expected  to  loan  money  without  in- 
terest. Interest  was  sinful  and  condemned  by  the  Church. 
In  times  of  money  stringency  during  these  centuries  pogroms 
would  start  against  the  Jews  who  were  found  to  have  the 
specie  largely  corralled.  Jews  in  those  days  were  mostly 


HISTORY  OF   BUSINESS   DEPRESSIONS  29 

pawnbrokers,  although  some  took  the  more  dignified  name 
of  goldsmiths.  They  were  money  lenders  and  the  people 
borrowed  from  them.  Then,  in  time  of  crop  failure  or  dis- 
tress the  Jews  would  be  found  to  have  both  money  and  prop- 
erty. It  was  during  these  periods  of  depression  that  the 
Jews  were  banished  from  nearly  every  European  country 
at  one  time  or  another.  Edward  I  took  all  the  money  away 
from  the  Jews  and  drove  every  one  of  them  from  England. 

As  politics  was  in  the  hands  of  religion  in  those  centuries, 
so  was  commerce,  and  to  persecution  and  intolerance  of 
religion  may  be  ascribed  the  decline  of  a  number  of  great 
commercial  nations.  The  Crusades  were  in  an  extraordinary 
phenomenon  in  the  economic  progress  of  the  world.  Popula- 
tion was  pressing  upon  the  means  of  subsistence  and  a 
cingle  crop  failure  precipitated  the  migratory  movement 
among  impoverished  people  whose  condition  was  one  of 
untold  misery.  It  is  easily  imagined  how  the  minds  of 
these  people  could  be  fired  by  the  preachings  of  religious 
leaders  and  the  tales  of  travelers  who  brought  stories  of 
rich  spoils  awaiting  the  sword  of  the  conqueror.  "There 
can  be  little  doubt  but  what  some  were  sincerely  animated 
by  a  desire  to  wrest  the  Holy  Land  from  the  Infidels,  but 
undoubtedly  the  great  army  of  crusaders  were  homeless 
itinerants  who  had  nothing  to  lose  and  all  to  gain.  These 
idlers  were  quickly  willing  to  fight  for  immediate  bread 
and  the  promise  of  future  reward.  But  the  movement  of 
these  great  armies  from  West  to  East  and  back  again  re- 
vived the  industries  of  the  nations  through  which  they 
passed,  created  new  and  broadened  ideas  of  the  world's  af- 
fairs, put  money  into  circulation,  and  started  a  new  system 
of  trade  and  commerce." 

The  Crusades  had  not  only  a  religious  aspect,  but  were 
a  source  of  great  commercial  riches  for  the  Venetians,  who 
had  risen  to  commercial  supremacy,  and  as  they  built  the 
fleets  that  carried  the  Crusaders  they  incidentally  took  the 
opportunity  to  open  up  new  trading  posts  in  the  Moham- 
medan countries,  thus  profiting  at  the  expense  of  their 


30  HISTORY   OF   BUSINESS   DEPRESSIONS 

fellow  Christians.  The  Crusades  brought  the  East  and 
West  together  and  stimulated  business,  but  after  their  fail- 
ure and  the  return  of  the  Christains  to  Europe  commerce 
declined  rapidly.  Oman  says  that  the  trade  of  Constanti- 
nople fell  off  one-third  to  one-half. 

England,  Germany  and  the  northern  countries  of  Europe 
claimed  that  their  trade  was  injured  and  depressed  because 
a  large  portion  of  their  wealth  was  taken  by  the  Church  of 
Rome.  Pope  Innocent  II  called  England  his  inexhaustible 
fountain  of  riches.  Economic  stringency  is  what  brought 
the  revolt  against  the  church. 

The  Hanseatic  League,  composed  of  towns  and  cities  of 
northern  Germany,  was  the  outgrowth  of  trade  conditions. 
When  depression  swept  over  them  it  set  the  tradespeople 
to  thinking,  and  they  devised  means  of  forming  a  league  so 
that  trade  might  be  stimulated  by  trading  among  them- 
selves. The  Hanseatic  League  became  so  powerful  that  in 
times  of  business  failure  its  members  insisted,  and  backed 
up  their  demands  by  force,  "that  they  should  be  paid  in 
full  before  any  other  debtors  were  considered,  and  they 
further  required  that  such  bankrupt  should  be  banished 
from  the  city  with  his  entire  family."  Through  the  influence 
of  the  Hanseas  the  city  of  Bruges  became  the  business  center 
of  Europe. 

In  the  Fourteenth  Century  the  financial  crisis  occurring 
in  England  under  Edward  III  was  so  severe  that  the  king 
could  not  pay  his  personal  obligations  to  his  Italian  bankers, 
who  then  had  the  upper  hand  financially  after  the  Jews  had 
been  driven  out  of  England  through  the  activity  of  the 
Roman  Church.  Money  was  so  scarce  that  the  Italians 
were  violently  attacked.  For  a  time  they  were  expelled 
from  London  and  nearly  ruined. 

One  of  the  most  peculiar  trade  depressions  in  history 
came  about  at  the  time  of  the  Reformation,  which  changed 
not  only  the  religion  but  the  commerce  of  the  greater  part 
of  northern  Europe.  In  those  times  fishing  was  the  lead- 
ing industry,  and  the  Catholic  church  with  its  many  fast 


HISTORY  OF  BUSINESS   DEPRESSIONS  31 

days  had  been  the  best  friend  to  the  herring  industry,  upon 
which  the  Hanseatic  League  was  originally  founded.  When 
the  followers  of  Martin  Luther  displaced  Catholicism  the 
demand  for  herrings  became  almost  nil,  bringing  chaos  and 
distress  in  this  important  industry,  affecting  all  branches 
of  the  trade. 

The  states  of  Italy  which  arose  from  the  ruins  of  ancient 
Rome  again  made  headway.  Venice,  Genoa  and  Florence 
waxed  powerful  until  reverses  came  with  the  closing  of  the 
markets  of  northern  Europe  because  of  religious  wars  and 
tariff  barriers.  Bankruptcy  became  frequent  and  the 
woolen  manufacturers  of  Florence,  who  employed  30,000 
men  at  one  time,  dropped  to  971.  The  people,  thrown  out 
of  employment  by  disrupted  commerce,  declined  into  poverty 
and  indolence. 

In  the  history  of  Venice  many  instances  are  found  of  the 
rise  and  fall  of  trade.  A  quarrel  with  Pope  Pius  II,  with  the 
consequent  excommunication,  caused  the  merchants  of 
Venice  to  be  prosecuted  throughout  Europe  and  their  mer- 
chandise confiscated  wherever  found.  But  this  did  not  dim 
her  prestige  for  long,  and  she  quickly  recovered  her  trade. 
Again  when  Vasco  da  Gama  discovered  the  passage  to  India 
by  rounding  the  Cape  of  Good  Hope,  returning  to  Portugal 
with  a  rich  cargo,  consternation  and  panic  reigned  in  Venice 
and  caused  her  traders  many  sleepless  nights.  It  sounded 
their  doom,  because  the  heavy  dues  exacted  by  sultans  and 
rulers,  through  whose  countries  the  Venetians  had  to  pass 
on  their  way  to  the  Orient,  made  the  cost  too  great  to 
compete  with  the  sea-borne  commerce  of  the  Portuguese.  So 
the  commerce,  and  with  it  the  prosperity,  of  Venice  de- 
clined, and  she  gradually  passed  out  as  a  power  in  the  world. 
The  Venetians  are  said  to  have  carried  on  their  trade  and 
kept  their  commerce  prosperous  even  amid  the  vicissitudes 
of  war.  Their  great  commercial  leader,  Doge  Mocenigo, 
on  his  death  bed,  with  the  senators  gathered  around  him, 
urged  that  the  commerce  of  the  nation  be  continued,  saying, 
"But  I  beseech  you,  avoid  as  you  would  fire  seizing  what 


32  HISTORY   OF   BUSINESS   DEPRESSIONS 

belongs  to  others  and  engaging  in  unjust  wars,  for  in  such 
wars  God  will  not  support  princes." 

Depressions  were  brought  about  in  these  times  by  the 
policy  of  prohibiting  exports  of  bullion  to  other  countries. 
Rulers  needed  a  greater  supply  of  ready  money  and  were 
eager  to  listen  to  the  argument  of  merchants  that  large 
exports  and  small  imports  created  a  balance  of  trade  favor- 
able to  the  nation.  When  the  country  found  itself  with  a. 
trade  balance  against  it,  instead  of  taking  means  to  in- 
crease their  exports  to  offset  their  trade  balance  they 
brought  on  great  distress  by  prohibiting  exports  of  bullion 
to  pay  such  trade  balance  to  other  countries.  Invariably 
this  further  depressed  commerce. 

At  the  end  of  the  Middle  Ages  Holland  and  Spain  were 
the  leading  commercial  countries  of  the  western  world.  In 
the  Fifteenth  Century  we  find  a  depression  brought  on  by 
conditions  similar  to  those  we  have  today.  It  was  the  time 
of  the  Guilds.  Day,  in  his  "History  of  Commerce,"  says: 
"(1)  The  privilege  of  monopoly  was  abused  by  limiting 
entrance  to  the  Guild  in  various  ways,  so  that  production 
was  restricted  and  prices  were  raised  to  the  detriment  of 
merchant  and  consumer.  Laborers  suffered,  also,  by  the 
lessened  demand  for  their  services.  (2)  Guilds  came  into 
frequent  conflict  over  the  question  as  to  which  had  the 
right  to  exercise  a  particular  branch  of  trade  or  manu- 
facture: these  quarrels  were  similar  to  those  arising  be- 
tween trade  unions  at  the  present  time.  Manufacturers 
suffered  from  the  separation  of  allied  trades,  and  time  and 
money,  which  ought  to  have  gone  into  the  business,  were 
wasted  in  long  lawsuits.  (3)  The  full  members  of  the 
guilds,  the  masters,  tried  to  keep  the  laborers  (apprentices 
and  journeymen)  in  an  inferior  position,  and  granted  pro- 
motion by  favor  rather  than  by  merit;  laborers  lost  the 
incentive  to  good  work  and  were  tempted  to  idleness  and 
disorder.  (4)  The  masters  tried  to  preserve  equality 
among  themselves.  Any  master  who  was  sufficiently 
enterprising  to  attempt  to  extend  his  business  by  intro- 


HISTORY   OF  BUSINESS   DEPRESSIONS  33 

ducing  improvements  or  by  employing  more  men  was  pulled 
back  to  the  general  level.  (5)  Technical  improvements 
were  prevented  also  by  the  regulations  which  were  adopted 
originally  to  secure  good  quality  of  the  product,  but  which 
hardened  into  a  routine  prescribing  the  details  of  every 
process  of  manufacture.  (6)  After  all  the  restrictions 
consumers  did  not  get  good  quality  even  when  they  paid 
high  prices.  They  could  not  punish  the  producers  of  poor 
goods  by  withdrawing  their  custom,  and  scamped  work, 
adulteration,  and  fraud  were  common." 

In  the  last  century  of  the  Middle  Ages  banking  developed 
into  the  methods  generally  used  in  the  present  day.  About 
this  time  the  doctrine  that  it  was  sinful  to  take  interest 
lost  its  force  because  economic  leaders  convinced  the  clergy 
that  money  secured  through  loans  could  be  put  to  good  use 
and  thus  encourage  legitimate  development.  In  those  days 
bankers  were  called  goldsmiths. 

Antwerp  was  then  the  leading  bourse  in  the  world.  There 
gathered  Italian  Hanseatics,  Portuguese,  Spanish,  English 
and  German  traders  dealing  in  commodities  from  all  over 
the  world.  Antwerp  being  the  financial  center  had  loaned 
money  to  royal  debtors  who  lost  in  wars  and  became  in- 
solvent. The  panic  and  depression  following  brought  the 
decline  of  Antwerp  and  the  center  of  the  financial  world 
went  to  London,  where  it  remained  for  almost  five  centuries, 
passing  to  New  York  during  the  recent  World  War. 

That  trade  cycles  involving  terrific  depression  must  have 
swept  over  the  world  in  the  Middle  Ages  is  apparent  from 
the  fact  that  there  are  lapses  in  the  pages  of  history  in 
which  the  records  of  commerce  are  entirely  submerged  and 
lost.  There  must  have  been  at  times  such  destitution  and 
disorganization  that  no  accounts  were  left  of  what  trans- 
pired. The  thread  is  often  broken,  and  when  the  ends  are 
caught  again  we  find  civilization  moving  in  a  different  direc- 
tion, taking  with  it  the  trade  supremacy  that  formerly  had 
been  elsewhere. 


CHAPTER  III 
DEPRESSIONS  OF  MODERN  EUROPE 

(FROM  THE  END  OF  THE  MEDIAEVAL  PERIOD  TO  THE 
NINETEENTH  CENTURY) 

Passing  from  the  Middle  Ages  to  modern  times,  we  ap- 
proach the  age  that  witnessed  the  growing  importance  of 
the  industrial  and  commercial  classes.  In  former  centuries 
laborers,  no  matter  of  what  breeding  or  state  of  intelligence, 
were  slaves.  Whatever  circumstances,  whether  the  for- 
tunes of  war  or  the  tides  of  trade,  brought  them  to  the  state 
of  labor  they  automatically  became  slaves.  The  close  of  the 
mediaeval  period  found  man  struggling  upward  to  a  state 
of  freedom.  Trade  and  commerce,  which  had  been  con- 
sidered degrading  and  had  been  engaged  in  by  the  lower  ele- 
ments of  mankind,  was  now  becoming  dignified,  and  of 
growing  importance.  The  old  days  "when  might  was  right" 
were  giving  way  to  a  time  when  peaceful  service  to  human- 
ity met  its  just  rewards.  The  world  emerged  from  feudal- 
ism because  of  the  demands  of  commerce  for  a  stronger  cen- 
tral government  to  ward  off  the  evil  effects  of  trade  declines 
and  local  depressions. 

Modern  ages  begin  with  the  discovery  of  America  by  Co- 
lumbus at  the  close  of  the  fifteenth  century.  We  then  enter 
the  Renaissance,  denoting  the  revival  of  taste  and  skill  and 
an  awakening  of  broader  intelligence. 

Great  riches  from  the  new  world  had  encouraged  thrift- 
lessness  in  Spain.  As  fast  as  she  received  cargoes  of  pre- 
cious metals  she  sent  them  out  of  the  country,  importing 
luxuries  instead  of  teaching  her  own  people  to  work  and 
produce.  It  is  said  that  many  times  before  fleets  arrived 
with  a  new  cargo  of  gold  and  silver  trade  was  stagnant  and 
depressed  because  the  previous  cargo  had  been  quickly  spent 
for  imported  goods.  The  wealth  of  the  new  world  enriched 
every  nation  except  the  one  that  imported  it.  The  Spanish 
Inquisition  in  the  16th  century  sought  to  restrict  personal 


HISTORY  OF  BUSINESS   DEPRESSIONS  35 

initiative  and  this  led  to  "universal  stagnation  of  the  coun- 
try," affecting  alike  agriculture  and  trade.  In  1515  the 
population  of  Spain  was  estimated  at  about  twelve  million 
people,  but  under  the  disastrous  rule  of  Philip  II  it  declined 
to  less  than  six  million,  the  cause  being  attributed  to  bad 
economic  conditions  after  the  banishment  of  the  Protestants. 
From  the  world's  richest  country  she  became  a  bankrupt  na- 
tion. Gold,  instead  of  proving  a  permanent  blessing  to 
Spain,  enriched  her  more  vigorous  neighbors  to  the  north. 
The  year  1548  records  a  distressing  depression  in  Eng- 
land, attributed  to  the  absorption  of  the  small  farms  by 
larger  land  owners  who  had  turned  their  farms  into  pas- 
tures for  sheep.  Gibbon  tells  of  a  petition  presented  to  the 
king  in  1536  complaining  "of  the  new  use  to  which  land  is 
put,  which  hath  not  only  been  begun  by  divers  gentlemen, 
but  also  by  divers  and  many  merchant  adventurers,  cloth- 
makers,  goldsmiths,  butchers,  tanners,  and  other  artificers, 
and  unreasonable  covetous  persons  which  doth  encroach 
daily  many  farms,  more  than  they  can  occupy,  in  tilth  of 
corn — ten,  twelve,  fourteen,  or  sixteen  farms  in  one  man's 
hands  at  once.  ...  In  time  past  there  hath  been  in 
every  farm  a  good  house  kept,  and  in  some  of  them  three, 
four,  five,  or  six  plows  kept  and  daily  occupied  to  the  great 
comfort  and  relief  of  your  subjects,  poor  and  rich.  But 
now,  by  reason  of  so  many  farms  engrossed  in  one  man's 
hands  which  cannot  till  them,  the  plows  be  decayed,  and  the 
farmhouses  and  other  dwellings,  so  that  when  there  was  in 
a  town  twenty  or  thirty  dwelling-houses  they  be  now  de- 
cayed, plows  and  all  the  people  clean  gone,"  and  the  churches 
down,  and  no  more  parishioners  in  many  parishes.'  Sir 
Thomas  More  speaks  of  the  increase  of  pasturage  in  Eng- 
land, "by  which  sheep  may  be  said  to  devour  men  and  to  un- 
people towns  as  well  as  small  villages." 

Another  writer  says:  "The  highways  and  villages  were 
covered,  in  consequence,  with  forlorn  and  outcast  families, 
now  reduced  to  beggary,  who  had  been  the  occupiers  of  com- 
fortable holdings,  and  thousands  of  dispossessed  tenants 


36  HISTORY   OF  BUSINESS   DEPRESSIONS 

made  their  way  to  London,  clamoring  in  the  midst  of  their 
starving  children  at  the  doors  of  the  courts  of  law  for  re- 
dress which  they  could  not  obtain." 

"The  complaints  are  found  voiced  in  ballads,  such  as  the 
following : 

"The  towns  go  down,  the  land  decays, 
Great  men  maketh  now-a-days 
A  sheep-cote  in  the  church." 

In  the  year  1552  a  commission  was  appointed  during  the 
rule  of  Edward  VI  to  "go  over  the  oft-trodden  ground  and 
glean  the  last  spoils  which  could  be  gathered  from  the 
churches.  Vestments,  copes,  plate,  even  the  coins  in  the 
poor-boxes  were  taken  from  the  churches  in  the  City  of 
London."  This  was  the  final  resort  in  extortion  of  money 
from  a  country  in  the  last  stages  of  industrial  depression. 

All  historians  refer  to  the  years  1557  and  1562  as  years 
of  stagnant  business  in  the  world  when  the  financial  and 
commercial  credit  of  all  Europe  was  shaken  to  its  founda- 
tions. 

A  severe  financial  crisis  occurred  in  1563,  when  the 
famous  Fugger  family,  said  to  have  been  worth  at  one  time 
forty  million  dollars  in  our  money,  failed.  This  family  was 
the  richest  family  in  Germany  and  financed  not  only  a  great 
deal  of  the  business  of  South  Germany,  but  loaned  to  the 
pope,  emperor,  and  kings  of  Europe.  The  bankruptcy  of 
this  firm  involved  widespread  disaster,  "for  as  time  went  on 
they  carried  on  their  business  less  and  less  on  the  money 
contributed  by  members,  and  more  and  more  on  their  credit. 
All  classes  in  the  community — nobles,  burghers,  peasants 
whose  savings  did  not  exceed  ten  florins,  even  servants — 
deposited  their  money  at  interest  with  the  financiers,  and 
were  involved  in  their  fall." 

Spain  suffered  a  violent  business  reaction  beginning  in 
1594,  when  her  population  again  began  to  decline  on  account 
.of  large  emigration  to  her  colonies.  This  decrease  was  sig- 
nificant because  it  depopulated  the  cities  where  her  industry 

*Quoted  by  Gibbon. 


HISTORY  OF  BUSINESS   DEPRESSIONS  37 

had  been  built  up,  this  industry  going  into  the  hands  of  com- 
mercial interests  of  other  countries.  Another  reason  given 
for  the  decline  was  the  Inquisition  under  which  a  million 
Meriscoes  and  thousands  of  Jews  were  exiled  under  eccles- 
iastical dictation.  The  decay  of  vigor  in  the  Spanish  politi- 
cal organization  brought  with  it  beggary  and  vagrancy  until 
it  became  a  national  curse.  The  depression  was  so  terrific 
and  prolonged  that  Spain  never  fully  recovered  from  it. 
Following  the  decline  of  Spain,  Portugal  rose  to  great  promi- 
nence and  was  a  factor  in  the  world's  affairs  for  some  years. 

The  German  states  experienced  a  decline  in  their  com- 
merce in  the  sixteenth  century.  It  grew  out  of  religious  and 
civil  wars  and  threw  their  trade  in  the  North  to  the  Baltic 
States  and  in  the  South  to  Italy. 

In  the  Sixteenth  Century  arose  the  mercantile  period. 
Previous  to  that  events  moved  slowly  and  depressions  were 
more  on  the  order  of  trade  declines,  being  gradual  and  aris- 
ing many  times,  though  not  always,  from  political  causes. 

The  famous  tulip  craze  centered  around  the  years  1630 
to  1635,  an  incident  unique  in  the  annals  of  commerce.  It 
is  known  in  history  as  the  "tulip-mania."  "The  tulip  was  a 
rare  flower  which  had  been  introduced  into  western  Europe 
from  Turkey  and  grown  in  the  horticultural  collection  of 
Counselor  Herwart  of  Augsburg.  The  plants  were  seen  by 
the  collector's  neighbors  who  desired  some  of  their  own. 
The  blooms  became  their  pride  and  others  were  infected 
with  the  desire  to  possess  them.  Before  long  the  single 
little  flower  had  turned  everything  topsy-turvy,  the  public 
had  caught  the  fever  and  started  speculating  in  tulips.  All 
Europe  became  involved  and  the  flower  gradually  found  its 
way  at  first  into  the  gardens  of  wealthy  people  and  later 
to  all  classes.  Holland  was  the  center  of  the  tulip  trade, 
and  in  that  country,  as  well  as  most  others,  it  became  the 
requisite  of  society  to  possess  a  collection  of  tulips.  But 
the  speculative  side  was  probably  the  most  romantic.  The 
state  of  the  people's  mind  was  such  that  they  wanted  excite- 
ment and  speculation.  We  read  of  a  trader  of  Harlem  who 


38  HISTORY  OF  BUSINESS   DEPRESSIONS 

gave  half  his  fortune  for  a  single  bulb.  A  book  of  one 
thousand  pages  written  on  the  tulip  at  the  time  describes 
another  bulb  for  which  2,500  florins  was  paid.  The  demand 
for  tulips,  particularly  rare  specimens,  had  increased  so 
that  they  were  quoted  daily  on  the  stock  exchange  of  Am- 
sterdam and  speculation  was  rife,  not  alone  in  the  individual 
tulips  but  in  the  stock  of  the  companies  importing  the  bulbs 
from  Constantinople." 

A  variety  called  the  "Viceroy"  was  sold  for  2,500  guilders ; 
another,  "Semper  Augustus,"  for  4,600  guilders.  They  were 
bought  and  sold  even  without  being  in  existence,  only  with 
reference  to  the  rise  and  fall  of  their  hypothetical  value.  An 
estate  in  one  case  had  to  be  sold  to  meet  the  deficits  of  a  spec- 
ulator. The  cities  of  Amsterdam,  Harlem,  Utrecht,  Alk- 
maer,  Leyden,  Rotterdam,  Woerden,  Hoorn,  Enkhuisen, 
Medemblyk,  became  so  speculation-crazed  that,  by  the  year 
1634,  not  only  every  leading  merchant,  but  nearly  every 
citizen,  was  engaged  in  the  trade. 

Self  ridge  gives  the  following  description  of  the  craze: 
"Stock  jobbers  made  the  most  of  the  mania.  Few  kept  their 
heads  and  fewer  kept  aloof  from  the  mania.  At  first — and 
it  was  at  this  immediate  period  that  the  disease  reached  its 
virulent  form — everyone  had  infinite  confidence  in  the 
values  and  the  speculators  gained.  The  market  broadened, 
and,  as  is  so  often  prayed  for  nowadays  by  Capel  Court  and 
Wall  Street,  the  public  came  in.  Everyone  seemed  to  be 
making  profits  from  tulips,  and  no  one  dreamed  that  prices 
could  fall.  People  of  all  grades  converted  their  property 
into  cash  and  invested  in  the  flowers.  Houses  and  lands 
were  offered  for  sale  at  ruinous  rates  or  assigned  in  pay- 
ment of  purchases  made  at  the  tulip  market.  Foreigners 
became  smitten  with  the  frenzy,  and  money  from  abroad 
poured  into  Holland.  As  a  result  living  became  more  ex- 
pensive and  altered,  and  in  a  short  space  of  time  almost  all 
conditions  of  life  had  to  be  readjusted  because  this  mania 
for  tulips  had  turned  all  the  people's  heads.  The  fever  of 
speculation  was  superseded  by  an  equally  intense  fever  of 


HISTORY   OF  BUSINESS   DEPRESSIONS  39 

pessimism.  The  whole  country  was  involved,  and  it  became 
imperative  that  something  be  done  to  prevent  general  bank- 
ruptcy. Public  meetings  were  held  everywhere.  The  Gov- 
ernment was  appealed  to.  But  even  governments  fail  in  the 
impossible,  as  well  as  in  matters  which  require  only  fair 
judgment  and  unselfishness.  The  Government  did  the  usual 
thing.  They  discussed  the  matter  for  three  months  and 
then  concluded  they  could  not  solve  the  problems,  and  thus 
the  whole  matter  rested.  Those  who  had  tulips  must  lose, 
and  lose  they  did,  and  this  applied  to  nearly  everyone.  Hol- 
land suffered  fearfully.  Her  people,  many  of  them  at  least, 
had  to  begin  the  accumulation  of  savings  or  of  fortunes  all 
over  again,  and  for  years  the  commerce  of  the  nation  lan- 
guished." 

The  mania  resulted  in  calamity  when  the  public  finally  be- 
came aware  of  the  gigantic  folly  of  the  whole  thing.  The 
sharper  speculators  repudiated  their  contracts  which  had 
been  made  for  future  delivery  and  the  bottom  fell  out  of  the 
tulip  market.  Many  who  had  counted  themselves  rich  in 
tulips  found  themselves  in  poverty  so  far  as  money  was  con- 
cerned. In  one  town  alone  during  these  three  years  there 
was  invested  in  hypothetical  tulips  more  than  10,000,000 
guilders.  London  and  Paris  had  followed  Amsterdam  in  the 
craze  but  with  a  lesser  frenzy.  Their  losses  were  great  but 
were  individual  instead  of  universal. 

In  1640  Charles  I  upon  ascending  the  throne  of  England 
found  an  empty  treasury  and  proceeded  to  seize  the  bullion 
deposited  by  the  merchants  in  the  Tower  of  London,  then 
used  for  the  safekeeping  of  money.  This  act  created  great 
public  distress. 

In  1662  Sir  William  Petty,  discussing  land  rents,  said: 
"The  medium  of  seven  years,  or  rather  of  so  many  years  as 
makes  up  the  cycle,  within  which  Dearths  and  Plenties  make 
their  revolution,  doth  give  the  ordinary  rent  of  the  Land  in 
Corn." 

When  Colbert  became  minister  of  finance  in  France  in 
1661,  he  found  business  languishing  and  the  country  im- 


40  HISTORY   OF  BUSINESS   DEPRESSIONS 

poverished.  England,  Holland  and  Spain  filled  the  country 
with  their  goods  and  were  enriched  by  her  trade.  He  saw 
that  his  first  duty  was  to  get  France  out  of  the  depression,  so 
he  proceeded  to  increase  production  at  home  by  stopping 
largely  the  importation  of  foreign  manufactures  and  prohib- 
iting the  exportation  of  gold  and  silver  coin.  Under  his  ad- 
ministration France  began  to  prosper. 

In  1672  Charles  II  of  England  found  his  coffers  bare  and 
his  credit  exhausted.  He  gave  a  violent  shock  to  business 
by  a  proclamation  "refusing  payment  out  of  the  exchequer 
of  money  advanced,  and  sequestrating  £1,328,526  to  his  own 
use.  The  money,  although  lent  by  the  goldsmiths  to  the 
king,  was  the  property  of  some  10,000  depositors  and  its  loss 
spread  ruin  and  suffering  throughout  London."  The  same 
year,  when  the  French  army  advanced  on  Utrecht,  a  run 
started  on  the  Bank  of  Amsterdam,  then  the  largest  in  the 
world,  but  the  bank  met  all  demands  and  weathered  the 
storm. 

The  business  depression  which  shook  Holland  in  1791 
resulted  in  the  failure  of  the  Bank  of  Amsterdam  after 
an  enviable  career  of  182  years,  and  marked  the  decline 
of  that  nation's  supremacy  in  commerce.  Holland  was  the 
center  of  stock-jobbing  and  speculation  in  the  seventeenth 
century,  and  naturally  she  felt  reactions  from  disturbances 
at  a  distance.  It  was  the  chief  aim  of  Napoleon  to  shake 
the  economic  structure  of  his  enemies,  particularly  England, 
and  he  used  every  means  to  break  the  Bank  of  England.  It 
would  be  useless  to  go  into  details  regarding  the  various 
business  setbacks  due  to  war  and  invasion,  because  that 
would  entail  a  recital  of  political  history  rather  than  the 
subject  we  have  at  hand. 

In  the  Seventeenth  Century  some  economists  actually 
thought  that  people  should  be  allowed  to  die  in  the  street. 
This  was  in  the  days  of  the  English  "Poor  Laws"  enacted  to 
alleviate  pauperism,  and  which  some  claimed  accelerated  it. 
In  those  days  vagrancy  did  not  imply  distress,  but  pros- 
perity. The  vagrant  laborer  was  one  of  high  skill  who  made 


HISTORY   OF   BUSINESS   DEPRESSIONS  41 

good  wages,  but  was  constantly  wandering  in  search  of 
still  higher  wages. 

In  the  early  centuries  of  modern  times  trade  was  severely 
depressed  from  time  to  time  by  religious  disturbances. 
"During  the  reign  of  Henry  VIII,  the  property  of  the  Cath- 
olic Church  was  confiscated,  which,  in  connection  with  the 
enclosures,  threw  large  numbers  of  people  out  of  employ- 
ment and  created  great  distress  among  the  laboring  classes. 
The  monasteries  held  large  tracts  of  land,  gave  support  and 
employment  to  multitudes  of  people,  and  at  the  same  time 
were  the  only  bodies  who  looked  after  the  poor,  and  assumed 
the  burden  of  distributing  public  charities.  The  confisca- 
tion of  the  property  of  the  guilds  was  another  act  of  Henry 
VIII  which  dealt  a  severe  blow  to  the  industrial  masses. 
The  lands  confiscated  were  handed  over  to  a  set  of  court  fa- 
vorites and  retainers." 

"Again  (in  France) ,  in  1685,  Louis  XIV  revoked  the  Edict 
of  Nantes  and  opened  a  war  of  persecution  against  the  Pro- 
testants. It  is  estimated  that  five  hundred  thousand  Pro- 
testants fled  and  sought  refuge  in  Germany  and  other 
Protestant  countries.  This  was  one  of  the  severest  blows 
ever  inflicted  upon  the  industries  of  France,  as  the  Hugue- 
nots were  largely  artisans  and  manufacturers  who  were 
placing  France  among  the  manufacturing  nations  of  the 
world,  and  laying  a  foundation  for  that  industrial  career 
which  has  always  contributed  so  greatly  to  the  wealth  and 
prosperity  of  a  country.  It  is  estimated  that  England  re- 
ceived about  fifty  thousand  of  these  people.  Charles  I  and 
James  II  issued  edicts  which  permitted  them  to  become  nat- 
uralized citizens  of  England.  Those  coming  from  Nor- 
mandy and  Brittany  settled  largely  in  the  suburbs  of  Lon- 
don, others  in  Coventry,  Sandwich,  Southampton,  Winchel- 
sea,  Dover  and  Wadsworth.  They  engaged  in  making  silk, 
linen,  paper,  clocks,  glass,  locks,  surgical  instruments,  and 
many  other  articles  requiring  a  high  order  of  skill  and 
artistic  taste." 


42  HISTORY   OF  BUSINESS   DEPRESSIONS 

In  1696  the  goldsmiths  organized  a  run  on  the  bank  of 
England  which  was  competing  with  them  and  strongly 
threatening  to  put  them  out  of  business.  In  that  year  busi- 
ness was  in  a  terrible  condition.  Coinage  had  become  so  de- 
based that  a  law  had  been  enacted  requiring  recoinage,  and 
during  this  period  business  languished  miserably. 

The  first  instance  of  what  we  today  call  "runs"  on  banks 
was  when  the  Dutch  fleet  entered  the  Thames.  When  their 
guns  were  heard  consternation  reigned  in  London.  Every- 
one who  had  any  money  had  deposited  it  with  the  gold- 
smiths, the  bankers  of  those  times.  This  money  was  known 
to  have  been  lent  to  the  government,  which  at  the  moment 
seemed  to  offer  no  security;  "each  man  then  hastened  to 
his  banker  in  the  hopes  of  being  in  time  to  save  some  rem- 
nants of  his  fortune." 

Describing  conditions  in  France  in  1689  La  Bruyere 
wrote,  "Certain  savage-looking  beings,  male  and  female,  are 
seen  in  the  country,  black,  livid  and  sunburnt,  and  belonging 
to  the  soil  which  they  dig  and  grub  with  invincible  stubborn- 
ness. They  seem  capable  of  articulation,  and,  when  they 
stand  erect,  they  display  human  lineaments.  They  are,  in 
fact,  men.  They  retire  at  night  into  their  dens  where  they 
live  on  black  bread,  water  and  roots.  They  spare  other  hu- 
man beings  the  trouble  of  sowing,  ploughing  and  harvesting, 
and  thus  should  not  be  in  want  of  the  bread  they  have  plant- 
ed." During  the  years  following  people  died  in  herds  from 
actual  poverty.  Taine  estimated  that  by  1715,  in  twenty-five 
years,  one-third  of  the  population,  six  million  people,  had 
died  of  starvation. 

At  the  end  of  the  Seventeenth  Century  the  Darien  scheme 
was  inaugurated  by  William  Patterson,  a  Scotchman,  who 
raised  a  large  sum  of  money  to  colonize  the  Isthmus  of 
Darien,  now  called  the  Isthmus  of  Panama,  and  its  failure 
had  the  most  serious  effect  on  Scotland,  impoverishing  that 
country  for  the  time.  It  brought  also  a  period  of  financial 
disturbances  in  England,  which  disheartened  the  business 
people  of  that  country.  Patterson  claimed  that  his  business 


HISTORY  OF  BUSINESS   DEPRESSIONS  43 

was  wrecked  and  the  panic  brought  on  by  his  commercial 
enemies  who  were  jealous  and  envious  of  his  company.  This 
has  a  familiar  sound  today.  It  was  during  this  period  that 
the  Bank  of  England  first  functioned  to  allay  the  distress 
of  depression.  In  those  days  there  were  long  periods  of 
prosperity  the  same  as  now,  and  they  all  ended  in  a  crash. 
There  were  no  oil  wells  then  to  take  the  money  of  the  gulli- 
ble, but  it  is  recorded  that  one  company  was  formed  in  Eng- 
land for  the  purpose  of  importing  jackasses  from  Spain  in 
order  to  breed  a  more  hardy  mule  in  England,  one  writer 
remarking  "as  if  there  were  not  enough  jackasses  in  London 
already." 

The  various  depressions  that  affected  European  countries 
in  the  Eighteenth  Century  were  more  or  less  of  a  local  char- 
acter, mostly  confined  to  one  particular  country  because 
commercial  operations  were  not  linked  by  international 
banking  credit  and  cable  connections  as  at  present.  The 
nearest  approach  to  a  general  crisis  came  in  1720  when  all 
Europe  was  struck  with  the  speculative  mania,  as  evi- 
denced by  the  South  Sea  Bubble  in  England  and  the  Mis- 
sissippi Bubble  in  France.  This  year  marked  the  most 
famous  financial  crash  in  the  history  of  the  world.  It  was 
a  double-barreled  explosion.  The  first,  in  England,  by  the 
bursting  of  the  South  Sea  Bubble  and  the  second,  in  France, 
by  the  pricking  of  the  Mississippi  Bubble.  In  England 
more  than  two  hundred  other  companies,  formed  along 
similar  lines,  followed  in  the  wake  of  the  South  Sea  Bubble. 
The  company  had  undertaken  the  preposterous  promise  of 
paying  the  national  debt  through  a  monopoly  of  the  whale 
fisheries  and  certain  trading  privileges  in  India.  For  a 
while  it  prospered,  but  in  1719  its  capital  was  raised  to  12,- 
000,000  pounds  and  turned  into  a  speculative  enterprise. 
On  the  strength  of  its  concessions  it  sold  stock  to  the  people, 
making  the  most  extravagant  and  exaggerated  promises. 

According  to  Andreadea  money  was  invested  in  schemes 
that  "stamped  the  minds  of  those  who  entertained  them 
with  what  may  be  truly  termed  a  commercial  lunacy."  One 


44  HISTORY  OF  BUSINESS   DEPRESSIONS 

project  was  for  the  discovery  of  perpetual  motion,  another 
for  building  of  hospitals  for  illegitimate  children,  another 
for  making  silver  out  of  lead,  another  to  make  salt  water 
fresh,  and,  finally,  the  most  remarkable  of  all  was  a  project 
to  found  a  company  "for  carrying  on  an  undertaking  of 
great  advantage,  which  shall  in  due  time  be  revealed." 
This  promoter  secured  2,000  guineas  in  a  single  morning 
and  made  off  with  it. 

The  bursting  of  the  bubble  caused  an  extraordinary  in- 
dustrial upheaval.  The  speculation  approached  insanity. 
Speculation  at  that  time  was  on  more  nearly  a  gambling 
basis  than  even  at  present.  The  buyer  of  these  stocks 
simply  bet  that  there  were  bigger  fools  than  he,  and  very 
little  trading  was  done  except  on  the  arbitrary  basis  that 
the  shares  should  pay  dividends  to  justify  the  rise  in  prices. 

In  promoting  the  South  Sea  Company  the  promoters 
employed  the  same  strategy  that  the  modern  stock  hawker 
employs.  They  promised  gold,  which  they  claimed  to  be  on 
their  land,  and  made  various  other  wild  statements.  Their 
shares  were  first  sold  at  a  small  price,  then  suddenly  the 
price  was  raised  and  raised  again.  People  who  profited  went 
wild  with  speculative  fever,  and  when  the  stock  had  come  to 
several  hundred  times  its  original  price  promoters  hastily 
sold  out  and  the  scheme  collapsed.  Some  writers  claim  the 
plan  of  the  South  Sea  Company  was  feasible  and  would  have 
made  good  if  the  speculative  spirit  had  not  entered  into  it, 
but  it  was  more  profitable  to  sell  stock  than  to  earn  divi- 
dends. It  was  calculated  that  the  value  of  all  stock  issued 
in  the  mushroom  companies  was  500,000,000  pounds  sterling. 
The  South  Sea  Company  itself  started  the  panic  by  launch- 
ing a  campaign  to  put  its  competitors  out  of  business,  in- 
stituting legal  proceedings  against  all  companies  that  they 
claimed  were  illegally  issuing  stock.  In  slaying  its  rivals 
the  company  struck  a  blow  at  itself  which  pulled  them  all 
down  together.  A  cry  of  rage  arose  against  the  Govern- 
ment, it  being  blamed  for  having  fostered  the  South  Sea 
scheme.  Old  families  were  ruined  and  new  ones  enriched. 


HISTORY  OF  BUSINESS   DEPRESSIONS  45 

The  principal  damage  was  done  by  the  business  depression 
which  followed,  together  with  attempted  readjustments  of 
the  financial  system.  The  Bank  of  England  itself  would 
have  been  ruined  had  its  own  proposals  been  accepted  in  an 
endeavor  to  save  the  South  Sea  Company. 

During  the  run  on  the  Bank  of  England  ruin  was  staved 
off  by  payments  in  light  sixpences  and  shillings  and  by  en- 
gaging men  to  fill  up  the  line,  draw  money  and  redeposit  it 
at  another  window.  This  slowed  up  the  run  until  a  holiday 
permitted  legal  closing,  after  which  the  alarm  subsided.  In 
an  investigation  that  followed  in  the  House  of  Commons,  it 
was  found  that  the  Chancellor  of  the  Exchequer  and  several 
members  of  Parliament  were  involved,  and  these  latter  were 
expelled  from  the  House.  The  government  did  much  to  al- 
leviate the  existing  distress,  and  unanimously  passed  a  reso- 
lution to  the  effect  that  "nothing  could  tend  more  to  the  es- 
tablishment of  public  credit  than  to  prevent  the  infamous 
practice  of  stock-jobbing."  Following  this  speculation  and 
the  failure  of  the  South  Sea  Bubble,  Sir  John  Barnard  spon- 
sored an  act  in  Parliament  against  stock-jobbing  and  specu- 
lation. This  is  the  first  effort  on  record  to  curb  the  evil  of 
speculation.  For  a  century  and  a  half  the  old  building  that 
housed  the  South  Sea  Company  on  Threadneedle  Street, 
London,  known  as  "the  Bubble,"  stood  as  a  melancholy  land- 
mark of  what  has  been  termed  "the  Folly  of  the  Ages." 
Robert  Walpole  became  first  Lord  of  the  Treasury  in  1721 
and  his  wise  statesmanship  averted  national  disaster.  He 
settled  the  South  Sea  affairs,  made  treaties  of  peace  with 
other  European  countries,  extended  the  colonization  scheme, 
and  a  period  of  quiet  and  prosperity  followed. 

With  the  South  Sea  Bubble  in  England  and  the  Missis- 
sippi Company  in  France,  coming  at  the  same  time,  Europe 
experienced  a  surfeit  of  speculative  disaster.  The  Missis- 
sippi Bubble  was  similar  in  plan  to  its  English  neighbor,  also 
uniting  with  its  commercial  projects  an  attempt  to  finance 
the  government.  A  Scotchman,  John  Law,  was  the  pro- 
moter. The  Company  of  the  West,  known  as  the  Mississippi 


46  HISTORY  OF  BUSINESS   DEPRESSIONS 

Company,  was  organized  in  1720  to  develop  the  resources  of 
French  holdings  in  Louisiana  and  Canada. 

The  ambitious  schemes  of  Louis  XIV  had  burdened 
France  and  were  such  an  incubus  on  the  industry  of  the 
country  that  the  entire  revenue  was  needed  to  meet  the  in- 
terest. Law  offered  to  "accept  at  par  all  the  government 
securities  then  afloat,  although  their  market  value  was  but 
50  per  cent.  As  an  equivalent  the  bank  was  to  be  declared  a 
state  bank,  and  its  notes  were  to  pass  as  current  money. 
Shares  in  the  state  bank  were  secured  upon  the  produce  of 
the  gold  mines  in  Louisiana,  the  direction  of  which  was  to  be 
controlled  by  a  Mississippi  company.  Although  gold  had 
not  as  yet  been  found  in  that  region — and  its  geological 
structure  proves  that  gold  never  will  be  found  there — shares 
in  the  company  were  eagerly  sought.  Money  poured  into 
the  bank  treasury,  and  Law  was  enabled  to  declare  a  divi- 
dend of  40  per  cent.  A  dividend  of  100  per  cent  was  as  easy 
as  that  of  5  per  cent  when  paid  in  a  paper  currency,  the 
amount  of  which  was  limited  only  by  the  means  of  printing. 
Government  proclamations  of  the  most  mischievous  as  well 
as  absurd  character  were  issued,  in  order  to  meet  the  diffi- 
culties of  the  moment." 

*"Extravagant  ideas  were  formed  of  the  possibilities  of 
Law's  system,  and  the  roads  to  Paris  were  blocked  by  people 
hurrying  there  to  speculate  in  shares.  Two  of  the  ablest 
scholars  in  France  deplored  the  madness  at  one  interview, 
and  at  the  next  found  themselves  bidding  against  each  other. 
Coachmen,  cooks,  and  waiters  became  millionaires  by  lucky 
speculation;  tradespeople  in  the  street  where  the  exchange 
was  established  made  fortunes  by  letting  out  their  stalls  and 
chairs.  The  price  of  stock  rose  until  it  frightened  even  the 
promoter  of  the  system,  who  interfered  in  the  hope  of  check- 
ing speculation,  but  who  found  soon  that  he  was  unable  to 
check  either  the  rise  or  the  fall  of  the  stock." 

The  shares  of  the  Mississippi  Company  advanced  to 
thirty-six  times  their  normal  par  value.  Legitimate  busi- 
ness enterprises  suffered  by  the  community  gamble  in  these 
stocks. 

*Day's  "History  of  Commerce." 


HISTORY   OF   BUSINESS   DEPRESSIONS  47 

The  crash  which  quickly  followed  was  especially  serious, 
as  the  whole  currency  consisted  now  of  discredited  notes 
issued  by  the  company.  Ruin  was  widespread,  and  credit 
received  a  blow  which  made  the  promotion  of  legitimate  en- 
terprises difficult  for  a  long  time  thereafter. 

The  investors  became  so  desperate  that  the  decree  of  Oc- 
tober 5,  1720,  forbade  speculative  operators  on  the  public 
streets  of  Paris,  and  the  speculators  were  driven  into  ob- 
scure corners  of  the  city.  Despair  spread  throughout  the 
kingdom.  A  few  were  made  rich,  but  thousands  were  im- 
poverished. Insurrection  was  imminent,  and  with  great 
difficulty  prevented.  The  result  of  an  investigation  insti- 
tuted by  the  Regent  proved  that  nothing  but  worthless  paper 
remained  to  represent  deposits  of  2,000,000,000  livres.  Law 
left  the  country  to  escape  the  wrath  of  his  victims.  The  ex- 
perience of  the  French  people  in  this  fiat  money  enterprise, 
although  it  entailed  great  suffering  and  hardship  on  those 
who  were  victimized,  served  to  furnish  the  world  a  lesson 
in  high  finance  that  has  never  been  forgotten.  Law's  sys- 
tem was  not  so  bad,  perhaps,  if  he  had  been  allowed  to  work 
it  out  in  an  orderly  way.  Many  features  of  our  Federal  Re- 
serve System  are  the  same  as  embodied  in  Law's  original 
plan.  That  Law  believed  in  the  scheme  he  promoted  is  more 
than  probable.  He  died  destitute  at  Venice.  Nor  was  the 
Regent  enriched.  The  political  consequences  of  this  disaster 
were  as  detrimental  to  France  as  were  the  commercial 
results. 

In  our  time  we  refer  to  "Black  Friday"  as  of  the  year 
1869,  but  the  original  "Black  Friday"  came  to  pass  the  6th 
day  of  December,  1745,  when  a  panic  spread  through  Eng- 
land based  on  a  rumor  of  French  invasion.  A  run  started 
to  withdraw  specie  from  the  Bank  of  England.  The  con- 
fusion was  so  great  that  all  the  business  houses  closed.  But 
the  merchants  met  and  agreed  to  accept  bank  notes,  passing 
a  resolution  urging  all  citizens  and  merchants  to  adopt  the 
notes.  This  declaration  was  signed  in  the  course  of  a  single 
day  by  1,140  merchants  and  fundholders. 


48  HISTORY  OF  BUSINESS   DEPRESSIONS 

England  experienced  another  crisis  in  1763  which  spread 
to  the  Continent.  The  Seven  Years  War  had  given  rise  to 
much  speculation  and  when  peace  came  the  day  of  reckoning 
was  at  hand.  This  brought  with  it  the  ruin  of  merchants 
and  speculators  as  well.  The  failure  of  a  firm  of  brokers  in 
Amsterdam  carried  with  it  eighteen  important  Dutch  houses 
and  many  merchants  in  Hamburg.  The  shock  was  so  great 
that  for  some  time  business  was  transacted  for  cash  only. 

In  1772  another  commercial  crisis  passed  over  England, 
starting  when  a  member  of  the  banking  firm  of  Heale  de- 
faulted, causing  the  ruin  of  creditor  merchants.  The  num- 
ber of  failures  that  year  reached  525,  the  greatest  since  the 
memorable  year  1720.  Writers  of  the  period  say  it  was  a 
return  of  the  South  Sea  year,  the  losses  reaching  £10,000,- 
000.  During  the  depression  which  followed  a  series  of  vig- 
orous measures  were  put  into  effect  to  alleviate  dangers  of 
the  kind  in  the  future.  During  this  crisis  the  mismanage- 
ment of  the  affairs  of  the  East  India  Company  was  an  im- 
portant factor  in  the  depression.  Adam  Smith,  in  "The 
Wealth  of  Nations,"  describes  the  conditions  thus :  "Their 
debts,  instead  of  being  reduced,  were  augmented  by  an  ar- 
rear  to  the  treasury  in  the  payment  of  the  £400,000,  by  an- 
other to  the  custom  house  for  duties  unpaid,  by  a  large  debt 
to  the  bank  for  money  borrowed,  and  by  a  fourth  for  bills 
drawn  upon  them  from  India,  and  wantonly  accepted,  to 
the  amount  of  upwards  of  £1,200,000.  The  distress  which 
these  accumulated  claims  brought  upon  them  obliged  them 
not  only  to  reduce  all  at  once  their  dividend  to  6  per  cent,  but 
to  throw  themselves  upon  the  mercy  of  the  government,  and 
to  supplicate,  first,  a  release  from  the  further  payment  of 
the  stipulated  four  hundred  thousand  pounds  a  year;  and, 
secondly,  a  loan  of  fourteen  hundred  thousand,  to  save  them 
from  immediate  bankruptcy." 

Another  alarming  crisis  occurred  in  1783,  following  the 
treaty  of  peace  with  the  American  States.  That  year,  fol- 
lowing the  surrender  of  Cornwallis  to  General  Washington 
and  the  British  fleet  to  the  Admiral  of  France,  British  con- 


HISTORY   OF   BUSINESS   DEPRESSIONS  49 

sols  fell  to  631/4,  the  lowest  on  record.  The  coming  of  peace 
had  brought  about  a  wide  extension  of  international  trade. 
New  markets  were  developed  very  rapidly  and  extravagant 
transactions  were  indulged  in.  All  of  this  produced  a  strain 
on  the  gold  reserves  and  finances  of  the  country  and  the 
crisis  followed. 

A  very  brief  review  of  the  conditions  which  prevailed  in 
France  immediately  preceding,  and  which  culminated  in  the 
French  Revolution  in  1789,  will  serve  to  show  how  difficult 
industrial  progress  had  been.  "All  the  privileges,  property 
and  political  rights  had  become  vested  in  the  clergy,  the 
nobles  and  the  king.  They  enjoyed  immunities,  favors,  pen- 
sions and  preferments,  while  the  mass  of  the  population 
bore  the  burden  of  taxation.  The  privileged  classes  num- 
bered about  270,000  persons,  140,000  nobles,  130,000  clergy. 
There  were  25,000  to  30,000  noble  families,  3,000  monks, 
2,500  monasteries,  37,000  nuns,  1,500  convents,  and  60,000 
curates  and  vicars  in  the  churches  and  chapels."  The  privi- 
leged classes  owned  one-half  of  the  kingdom. 

Taine's  description  of  the  economic  condition  of  the  people 
is  vividly  drawn:"  Examine  administrative  correspondence 
for  the  last  thirty  years  preceding  the  Revolution.  Count- 
less statements  reveal  excessive  suffering,  even  when  not 
terminating  in  fury.  Life  to  a  man  of  the  lower  class,  to 
an  artisan,  or  workman,  subsisting  on  the  labor  of  his  own 
hands,  is  evidently  precarious, — he  obtains  simply  enough 
to  keep  him  from  starvation  and  he  does  not  always  get  that. 
Here,  in  four  districts,  'the  inhabitants  live  only  on  buck- 
wheat,' and  for  five  years,  the  apple  crop  having  failed,  they 
drink  only  water.  There,  in  a  country  of  vineyards,  'the 
vine-dressers  each  year  are  reduced,  for  the  most  part,  to 
begging  their  bread  during  the  dull  season.'  ...  In  a 
remote  canton  the  peasants  cut  the  grain  still  green  and  dry 
it  in  the  oven,  because  they  are  too  hungry  to  wait." 

"Many  farms  remain  uncultivated,  and,  what  is  worse, 
many  are  deserted.  According  to  the  best  observers,  'one- 
quarter  of  the  soil  is  absolutely  lying  waste.  .  .  .  Hun- 
dreds and  hundreds  of  arpents  of  heath  and  moor  form  ex- 
tensive deserts.'  .  .  .  This  is  not  sterility  but  decadence. 


50  HISTORY   OF   BUSINESS   DEPRESSIONS 

The  regime  invented  by  Louis  XIV  has  produced  its  effect; 
the  soil  for  a  century  past  is  reverting  back  to  a  wild  state. 

.  .  .  In  the  second  place,  cultivation,  when  it  does  take 
place,  is  carried  on  according  to  mediaeval  modes." 

"Peasants  and  laborers  were  compelled  to  work  on  roads 
and  bridges  without  pay.  The  small  farmer  was  under  the 
absolute  control  of  the  nobles  and  subjected  to  the  most  ar- 
bitrary exactions  and  species  of  robbery.  He  must  grind  his 
corn  at  the  lord's  mill  and  press  his  grapes  at  the  lord's  wine 
press,  and  pay  whatever  sum  was  exacted.  Louis  engaged 
in  corrupt  schemes  of  impoverishing  the  people  and  filling 
the  public  treasury.  The  shipment  of  grain  was  prohibited 
from  one  province  into  another,  while  he  lowered  the  price 
and  bought  up  the  surplus,  and  when  the  scarcity  thus 
brought  about  enhanced  prices  he  sold  at  a  profit.  He  laid 
tribute  on  the  business  and  industrial  classes  by  granting 
licenses  and  selling  to  individuals  the  sole  right  to  engage 
in  a  particular  calling  or  trade.  Class  hatred  became  in- 
tense and  a  spirit  of  unrest  and  jealousy  pervaded  the  whole 
nation.  The  nobles  looked  upon  the  trading,  industrial  and 
laboring  classes  with  contempt.  The  king  treated  them 
'only  as  a  sponge  to  be  squeezed/  ' 

This  was  the  condition  under  which  26,000,000  people 
existed  in  1789  and  was  the  scene  of  economic  depression 
that  brought  on  the  terrible  and  bloody  French  Revolu- 
tion. 

In  1795  England  experienced  another  severe  depression. 
The  country  passed  quickly  from  abundance  to  scarcity, 
scarcity  to  famine,  and  famine  to  bankruptcy.  The  Bank  of 
England  suspended  cash  payments.  The  disorders  in  busi- 
ness were  severe.  The  harvest  in  1792  was  very  bad,  as 
were  most  of  the  harvests  between  1789  and  1802,  the  price 
of  corn  had  risen  13s,  and  in  addition  to  the  agricultural  dis- 
tress, a  serious  economic  crisis  occurred. 

The  year  1797  marked  a  period  of  crisis  in  Ireland  which 
coincided  with  the  fall  in  exchange  unfavorable  to  Ireland 
and  an  increase  in  issues  of  the  Bank  of  Ireland.  These 
events  bring  us  to  the  nineteenth  century. 


CHAPTER  IV. 

FOREIGN  DEPRESSIONS  FROM  THE  BEGINNING  OF 
THE  19TH  CENTURY  TO  THE  PRESENT  TIME 

The  beginning  of  the  Nineteenth  Century  found  Europe 
warring  and  in  need  of  the  products  of  the  new  republic 
that  had  sprung  up  across  the  seas,  giving  America  an  op- 
portunity to  gain  a  foothold  among  nations  without  inter- 
ference and  to  wax  prosperous  economically  at  the  expense 
of  the  Old  World. 

The  economic  situation  in  France  in  1805  was  extremely 
bad  and  the  victory  of  Austerlitz  was  all  that  saved  the 
financial  structure  of  the  Empire.  It  is  said  that  the 
financial  crisis  absorbed  the  thoughts  of  Napoleon  on  the 
battlefield  as  much  as  the  fighting  itself. 

"The  liquidation  which  followed  the  crisis  of  1805  caused 
coin  to  pile  up  in  the  Bank  of  France  to  such  an  extent  that 
the  bank  was  obliged  to  invest  a  part  in  the  obligations  of 
the  receivers  generally  and  to  reduce  interest  to  2  and 
3  per  cent.  Commerce  began  to  expand  again  after  1808, 
and  the  discounts  of  the  Bank  of  France  reached  in  that 
year  142,000,000  francs  and  in  1810,  187,000,000  francs." 

The  business  depression  of  1808  affected  all  the  western 
world.  Following  trouble  in  North  America  it  spread  to 
English  institutions  in  Lancashire.  That  country  held 
American  investments  to  a  large  extent.  From  there  it 
spread  over  England,  Ireland  and  on  to  the  Continent.  When 
the  trouble  started  in  America,  London  houses  attempted 
to  help  conditions  here  because  it  would  not  do  to  let  their 
American  creditors  fail.  But  they  were  soon  forced  to 
turn  their  attention  to  the  home  situation,  and  it  was  several 
years  before  matters  had  worked  themselves  out  and  con- 
ditions returned  to  normal.  At  the  height  of  French  power, 
from  1806  to  1815,  under  the  Berlin  decree  of  Napoleon 


52  HISTORY   OF   BUSINESS   DEPRESSIONS 

prices  on  commodities  rose  very  high  in  England  and  there 
was  a  tendency  to  unprecedented  speculation.  While  the 
French  decree  did  not  shut  off  English  commerce,  there 
was  fear  that  it  would  have  this  effect. 

Some  writers  claim  that  the  depression  following  the 
Napoleonic  Wars  started  in  1815,  but  from  the  best  author- 
ities it  is  found  there  was  an  over-lap  of  several  years  of 
good  times,  due  to  the  large  amount  of  inflated  money  still 
in  circulation.  This  lasted  until  about  1819.  Alison  is 
authority  for  the  statement  that :  "Yet  the  years  from  1815 
to  1819,  though  checkered  with  suffering  from  these  causes, 
and  from  two  bad  harvests  in  1816  and  1818,  were  upon 
the  whole  prosperous."  The  depression  came  on  at  its 
worst  in  1819  when,  with  a  comparatively  small  amount  of 
gold  on  hand,  specie  payment  was  resumed  under  the  gold 
standard,  and  this  not  only  caused  a  sudden  and  great  con- 
traction in  the  volume  of  currency,  but  it  reduced  every- 
thing from  inflated  and  fictitious  valuations  to  a  gold  basis. 
The  country  banks  of  England  increased  under  the  stimulus 
of  speculation  from  270  in  1797  to  600  in  1808,  and  721  in 
1810.  The  Bank  of  England,  in  the  meantime,  increased 
its  discounts  from  £9,100,000  in  1804  to  £16,400,000  in 
1809  and  £21,400,000  in  1810.  The  circulation  of  the  Bank 
of  England  rose  from  £16,400,000  in  1801  to  £24,200,000 
in  1810,  but  the  increase  was  trifling  up  to  1809,  and  was 
the  consequence  rather  than  the  cause  of  the  great  increase 
in  prices  due  to  speculation. 

The  quick  recovery  of  France  from  the  most  terrible 
industrial  depressions  usually  connected  with  her  wars  has 
been  indeed  a  marvel.  After  Waterloo  she  was  obliged  to 
issue  500,000,000  francs,  resulting  in  a  disastrous  fall  of 
her  securities  and  values  in  general.  "The  metallic  reserve 
of  the  Bank  of  France  fell  from  117,000,000  francs  on  July 
1,  1818,  to  37,000,000  francs  on  October  29th.  The  bank 
shortened  the  term  of  commercial  discounts  to  forty-five 
days,  and  in  1819  was  flooded  again  with  idle  capital." 


HISTORY   OF  BUSINESS   DEPRESSIONS  53 

America  began  to  feel  the  effects  of  the  Napoleonic  Wars 
about  1818,  and  this  lasted  through  1819  and  1820,  but 
France  felt  the  effects  previous  to  this  time,  although  the 
disturbance  reached  its  height  in  Europe  in  1820.  The 
long  stretch  covering  the  Napoleonic  Wars  in  Europe  helped 
the  United  States  to  get  on  her  feet  economically,  while 
England  was  having  her  own  troubles.  The  Bank  of  Eng- 
land suspended  cash  payment  on  its  own  notes  when  the 
war  broke  out  and  it  was  not  for  twenty  years,  or  until 
1819,  that  it  was  again  resumed.  During  all  that  time 
England  was  on  a  paper  credit  basis,  and  yet  she  carried  on 
some  of  the  greatest  wars  and  commercial  projects  of  her 
history. 

Let  us  compare  existing  conditions  of  1920-21  with  those 
following  the  Napoleonic  wars,  a  little  over  one  hundred 
years  ago.  Osgood's  description  of  that  period  follows: 

"The  Battle  of  Waterloo,  in  1815,  brought  peace  to  Eng- 
land, and  with  it  a  great  business  depression  which  plunged 
thousands  of  people  into  misery.  With  her  great  navy 
England  had  been  able  to  give  her  merchant  ships  better 
protection  on  the  seas  than  any  other  nation,  and  so  her 
goods  had  little  competition  from  her  European  rivals  in 
many  markets.  Now  that  peace  was  declared,  France  and 
Holland  were  selling  their  wares  in  competition  with  the 
English.  The  English  factories  had  made  up  more  stuff 
than  they  could  sell  under  peace  conditions,  and  they  were 
obliged  partially  to  close  down ;  but  at  the  very  time  when 
they  were  discharging  their  workers,  soldiers  and  sailors 
were  coming  home  by  the  thousand,  looking  for  employ- 
ment. For  every  job  there  were  two  applicants.  Wages 
fell  with  a  crash.  The  farmers  were  in  much  the  same 
predicament  as  the  manufacturers;  they  had  brought  more 
land  than  ever  before  under  cultivation  just  at  the  time 
that  the  factory  people  in  England  had  less  money  than 
ever  to  buy.  One  fanner  competed  with  another  for  what 
business  there  was,  and  prices  fell.  Those  who  had  bought 
or  rented  land  at  war  prices  found  that  they  could  not  make 
the  interest  on  their  investment  or  pay  their  rent;  those 
who  had  mortgaged  their  land  were  sold  out.  Much  of 
the  land  that  was  reclaimed  had  to  be  allowed  to  return  to 


54  HISTORY  OF  BUSINESS   DEPRESSIONS 

its  wild  state.  At  the  same  time  farmers  who  held  their 
land  were  driven  to  farming  in  a  more  careful  way  than 
ever  before.  To  produce  with  the  least  possible  expense 
means  efficiency  in  farming,  and  this  the  hard  times  taught 
to  those  who  survived  the  depression. 

"The  effect  of  the  Napoleonic  wars  on  the  industrial  and 
commercial  life  of  the  German  States  and  Prussia  was  most 
ruinous.  Lying  between  France,  Austria  and  the  Russian 
frontier,  they  became  the  battle-ground  during  this  great 
struggle  for  the  contending  hosts  of  Napoleon,  Russia  and 
Austria.  Through  the  continental  policy  of  Napoleon  their 
markets  were  open  to  the  competition  of  French  goods, 
while  they  were  compelled  to  pay  tribute  to  the  support  of 
French  armies  and  subjected  to  the  most  oppressive  and 
burdensome  taxation." 

In  the  early  part  of  the  Nineteenth  Century  it  was  said , 
that  Switzerland  was  the  barometer  which  indicated  the 
state  of  business  in  Europe.  Switzerland  was  a  neutral, 
never  at  war,  although  affected  by  the  wars  which  raged 
around  her.  Because  of  her  position  conditions  within  her 
borders  reflected  the  general  commercial  atmosphere  of 
Europe  as  a  whole. 

"Lyons  was  the  chief  manufacturing  city  in  France,  be- 
ing the  centre  of  the  silk  trade,  and  possessing  a  valuable 
traffic  with  England,  America,  Germany,  Belgium,  Russia, 
Turkey,  and  Spain.  The  operatives  suffered  from  the 
vicissitudes  peculiar  to  their  trade,  and  held  the  reputation 
of  being  turbulent  and  disaffected  in  times  of  depression, 
when  they  have  frequently  risen  against  the  authorities." 

Recovering  from  this  stagnation,  a  boom  started,  lasting 
several  years,  until,  following  this  period  of  intense  specula- 
tion and  wide  inflation,  the  inevitable  crash  came,  leading 
to  the  depression  of  1825.  "In  October,  1824,  the  coin  and 
bullion  at  the  Bank  of  England  amounted  to  eleven  and 
three-quarter  millions;  in  August  it  barely  reached  three 
and  three-quarter  millions  sterling.  These  figures  tell  their 
own  tale.  At  the  beginning  of  December  several  banks 
failed,  panic  reigned,  the  Bank  of  England  was  almost 
drained  of  its  gold.  The  story  is  told  that  the  credit  of 


HISTORY   OF  BUSINESS   DEPRESSIONS  55 

the  country  was  saved  only  by  the  accidental  discovery  at 
the  last  moment  of  a  box  containing  one-pound  notes  to  the 
amount  of  upwards  of  half  a  million  sterling ;  but  although 
such  a  box  was  undoubtedly  so  discovered,  the  tide  of  the 
panic  had,  it  seems,  been  stemmed  by  that  time.  The  Bank 
of  England,  by  the  wise  freedom  with  which  it  discounted 
bills  and  paid  out  money,  exhausted  the  terror  of  the  public." 
Previous  to  the  crisis  of  1825  money  could  be  borrowed 
from  English  banks  at  2  per  cent.  At  that  time  there 
was  a  proverb  current  in  the  financial  world  that  "John 
Bull  can  stand  many  things  but  he  cannot  stand  2  pel 
cent."  When  the  price  of  money  remains  at  a  low  level  for 
any  considerable  period  people  will  turn  to  risky  invest- 
ments if  no  good  ones  offer  themselves,  and  a  crisis  is  the 
necessary  result  of  such  experiments.  This  low  rate  of 
interest  is  what  brought  about  the  crisis  of  this  year,  par- 
ticularly encouraging  speculation  in  South  American  enter- 
prises. This  began  following  the  South  American  Revolu- 
tion, which  threw  off  the  yoke  of  Spain  and  left  several 
countries  open  to  free  trade  with  England.  Some  writers 
estimate  that  150,000,000  pounds  were  invested  in  Latin 
America,  and  when  it  was  evident  that  they  would  not 
begin  to  pay  the  collapse  came.  The  Bank  of  England 
realized  its  mistake  at  the  last  minute  and  raised  its  dis- 
count rate  to  5  per  cent.  But  the  bank  reserves  con- 
tinued to  decline  until  December  31st,  1825,  when  they 
reached  only  1,260,895  pounds,  which  led  to  unheard  of 
confusion.  The  scarcity  of  coin  was  such  that  business 
was  almost  at  a  standstill.  Sixty  financial  companies  went 
down.  The  London  bank  failed.  General  distress  in- 
increased  by  the  failure  of  thirty-six  country  banks  and 
numerous  important  commercial  firms  throughout  Great 
Britain.  The  stringency  in  gold  was  due  to  "the  immense 
loans  contracted  by  the  governments  of  Europe  and  Latin 
America  and  the  fever  of  speculation  in  domestic  and 
foreign  companies,  which  drained  England  of  her  specie. 
Besides,  considerable  financing  was  necessary  to  establish 


56  HISTORY   OF  BUSINESS   DEPRESSIONS 

the  new  States  in  Europe  that  had  been  carved  out  of  the 
French  Empire.  All  of  this  seriously  lowered  the  stock  of 
gold  in  London.  It  was  estimated  that  £150,000,000  of 
British  money,  including  that  invested  in  government  loans, 
had  been  sunk  in  Mexico  and  South  America  alone. 
Domestic  activities  were  marked  by  extensive  building  of 
canals  and  turnpikes.  Besides,  there  were  six  hundred  and 
twenty-four  domestic  stock  companies  organized  in  the  two 
years  preceding,  with  a  nominal  capital  of  £372,173,100. 
Demands  for  so  much  capital  caused  a  sharp  increase  in 
the  value  of  money  and  the  prices  of  commodities,  and 
manufacturers  were  forced  to  borrow  money  at  the  in- 
creased rates  to  carry  on  their  ordinary  operations.  The 
reserves  of  the  Bank  of  England  became  depleted  with  the 
large  loans;  foreign  exchange  turned  against  her;  rates 
of  interest  went  higher,  and  business  broke  under  the  load. 
From  June  11, 1838,  to  June,  1839,  there  were  306  failures  in 
London,  and  781  in  the  provinces. 

The  condition  of  woolen  manufacturers  in  England  in 
1826  was  described  by  an  English  manufacturer  who  wrote 
to  his  brother  in  America:  "If  you  were  in  this  country 
you  would  scarcely  hear  the  sound  of  a  woolen-shuttle  in 
all  the  neighborhood;  and,  take  all  Saddleworth  through, 
you  will  not  find  one  shuttle  out  of  forty  going.  It  is  in- 
deed one  of  the  greatest  convulsions  the  mercantile  world 
has  ever  known,  and,  since  the  date  of  the  South  Sea  trouble, 
probably  has  not  had  a  parellel." 

From  1836  to  1839  depression  again  stalked  through 
Europe.  England  experienced  a  crisis  in  1836,  which  may 
have  been  the  forerunner  of  our  trouble  of  1837.  On  top 
of  her  own  difficulties  England  was  particularly  affected 
by  our  panic  because  of  her  large  investments  in  this 
country.  In  that  year  France  felt  the  flurry  less,  and  the 
Bank  of  France  was  able  to  lend  aid  to  the  Bank  of  Eng- 
land, as  well  as  to  the  United  States  and  to  Belgium.  The 
Bank  of  Belgium  suspended  in  1838.  A  series  of  reverses 


HISTORY  OF  BUSINESS   DEPRESSIONS  57 

occurred  in  Holland  in  the  years  1837  and  1838.  Numerous 
mercantile  failures  took  place  and  a  brief  panic  ensued. 

The  European  troubles  started  in  November,  1836,  with 
the  failure  of  two  banks,  one  in  Ireland  and  one  in  Man- 
chester. "Three  large  business  houses  known  as  the  three 
W's, — Wilkes,  Wilde,  and  Wiggin, — which  had  closest  rela- 
tions in  the  granting  of  credit  to  America,  were  in  particular 
affected.  Since  the  imports  of  the  United  States  to  this 
time  largely  exceeded  the  exports  the  balance  was  met  not 
by  settlements  in  specie,  but  by  the  sale  of  American  securi- 
ties of  one  sort  or  another  and  by  the  securing  of  credits 
abroad."  The  distress  continued  in  England  until  1839. 
It  was  so  severe  that  revolutionary  propaganda  was  spread 
broadcast  and  the  "Condition  of  England"  was  seriously 
discussed  in  the  Cabinet. 

A  vivid  description,  typical  of  old  time  panics,  is  given 
by  writers  of  the  time.  We  have  witnessed  them  in  our 
country,  but  our  children,  perhaps,  never  will.  John 
Francis  wrote:  "Consternation  reigned  paramount,  and 
almost  every  third  man  was  a  defaulter.  All  foreign  securi- 
ties were  without  a  price;  the  bankers  refused  to  advance 
money ;  the  brokers'  cheques  were  at  first  doubted  and  then 
rejected.  With  a  desperation  which  will  never  be  forgotten, 
the  jobbers  closed  their  books,  refused  to  transact  any  busi- 
ness, and  waited  the  result  in  almost  abject  despair." 

From  1845  to  1847  England  had  what  is  called  her  Rail- 
road Panic.  Fifty-two  new  railroad  companies  were 
chartered  in  England  in  the  first  four  months  of  1845.  I? 
addition  a  large  number  had  already  started  building.  So 
fierce  was  the  mania  for  buying  railroad  stock  that  disaster 
was  early  predicted.  The  London  Times  said:  "We  can 
not  add  fifty  millions  of  money  to  railway  enterprises  with- 
out the  most  ruinous,  universal,  and  desperate  confusion." 
To  the  newspaper  efforts  were  added  repeated  warnings 
by  leading  financiers.  Finally  came  a  general  uncovering 
of  big  frauds.  The  London  City  Press  said :  "Never  since 


58  HISTORY   OF  BUSINESS   DEPRESSIONS 

the  days  of  the  old  South  Sea  Bubble  has  wild  speculation 
run  so  rampantly  mad." 

A  large  number  of  the  new  railway  schemes  had  to  be 
abandoned,  and  many  persons  possessed  of  property  and 
estates  found  themselves  involved  in  sudden  and  unforeseen 
disaster. 

At  the  same  time  there  was  great  speculation  in  grain 
and  cotton.  In  1847  business  on  the  whole  European 
continent  suffered  severe  reaction  because  of  heavy  rail- 
road building  which  was  reflected  in  this  country  by  a 
temporary  crisis  and  depression. 

The  severe  depression  occasioned  in  Ireland  by  the  potato 
crop  failure  in  1847  paralleled  famines  of  the  darkest  ages 
of  the  human  race.  Peasants  literally  died  of  hunger  in 
large  numbers.  In  some  districts  it  became  impossible  to 
provide  coffins.  The  population  decreased  from  eight  to 
six  million  in  two  years.  More  than  700,000  migrated  to 
the  United  States. 

France  experienced  another  severe  depression  between 
1835  and  1840,  the  period  when  the  failure  of  the  Bank  of 
France  to  meet  expanding  commercial  needs  being  most 
keenly  felt.  Louis  Philippe  owes  his  fall  in  1848  to  the 
financial  crisis  and  business  depression  which  preceded  it. 
There  had  been  a  long  series  of  business  failures,  and  the 
economic  situation  was  so  strained  that  the  people  became 
desperate.  In  1848  and  again  in  1871  the  Bank  of  France 
suspended  payments,  but  its  notes  did  not  depreciate 
seriously. 

The  panic  which  started  in  the  United  States  in  1857 
spread  over  the  entire  commercial  world.  The  news  of  the 
failure  of  the  Ohio  Life  and  Trust  Company  caused  intense 
alarm  in  England  for  the  £80,000,000  of  English  money 
which  was  believed  to  be  invested  in  American  securities. 
A  group  of  speculators  added  to  the  alarm  in  London  by 
forming  a  combination  to  'bear*  the  market,  by  finding 
flaws  in  securities  and  working  through  the  press  to  excite 
general  distrust  and  depress  prices."  Runs  started  on  banks 


HISTORY   OF  BUSINESS   DEPRESSIONS  59 

all  over  England  and  the  Bank  of  England  itself  was  about 
to  suspend  when  "a  letter  reached  the  bank  on  November 
12th  authorizing  them  to  issue  notes  in  excess  of  the  legal 
limit,  provided  they  maintained  the  rate  of  discount  at  10 
per  cent."  Public  excitement  was  suddenly  calmed,  but  the 
demand  for  discounts  continued  heavy  for  more  than  a 
fortnight. 

The  English  iron  and  textile  industries  were  especially 
affected.  Factories  were  closed,  blast  furnaces  extinguished, 
and  the  greatest  distress  prevailed  amongst  the  working 

classes. 

The  pressure  on  the  money  markets  of  Europe  was  severe 
and  prolonged,  and  those  with  investments  in  America  were 
obliged  to  absorb  their  losses.  Great  prosperity  in  America 
during  the  ten  years  preceding  1857,  referred  to  as  the 
"Golden  Age,"  had  attracted  millions  of  dollars  of  European 
capital.  Europe  had  over-loaned  and  we  had  over-spent. 
There  was  a  crash  due  in  both  countries.  So  heavy  were  the 
American  investments  that  money  again  became  scarce,  but 
the  cry  had  gone  up  against  sending  so  much  money  to 
America.  It  seemed  that  everybody  had  investments  in 
the  New  World.  English  banks  holding  American  securities 
closed  their  doors  one  after  another.  As  was  customary  in 
England,  the  crisis  was  followed  by  an  inquiry.  English 
people  want  to  know  the  why  and  wherefore  of  their  losses. 
The  discussion  brought  out  the  old,  old  story  of  speculation 
and  the  entire  lack  of  discretion  on  the  part  of  public,  banks 
and  business. 

Simultaneously  with  the  development  of  the  American 
panic  of  1857  mutiny  broke  out  in  India.  With  this  came 
the  news  of  the  failure  of  the  Western  Bank  of  Scotland. 
During  this  crisis  the  discount  rate  of  the  Bank  of  England 
reached  10  per  cent.  Seventy  members  of  the  London  Stock 
Exchange  failed.  Officials  of  the  Bank  of  England  after- 
ward said  that  there  was  more  commercial  distress  caused 
by  the  panic  of  1857  than  by  that  of  1847. 


60  HISTORY  OF  BUSINESS  DEPRESSIONS 

An  important  step  was  taken  by  the  Bank  of  England, 
following  the  panic  of  1857,  for  the  protection  of  its  gold 
reserve.  This  consisted  in  raising  the  rate  of  interest 
rapidly  by  degrees  of  one  per  cent  at  a  time,  instead  of 
fractions  of  one  per  cent,  in  order  to  curtail  the  export  of 
gold.  Other  countries  on  the  Continent  suffered  in  the 
crisis,  though  less  acutely  than  England,  France  and 
America,  because  of  the  smaller  scope  of  their  commercial 
affairs. 

France  experienced  her  troubles  also.  The  Credit 
Mobilier  had  paid  10  per  cent  in  1853 ;  13  per  cent  in  1854 ; 
47  per  cent  in  1855;  24  per  cent  in  1856;  and  then  the 
crash  came.  Paris  and  other  cities  felt  the  same  stagna- 
tion in  trade,  the  discharge  of  workmen,  and  the  glut  of 
commodities,  as  existed  in  England  and  the  United  States. 
The  same  phenomena  existed  in  Germany,  Austria,  Bel- 
gium and  Scandinavia  in  smaller  degree.  Hamburg,  which 
was  closely  connected  with  American  trade,  felt  it  most. 
It  spread  to  India,  China,  Australia  and  South  America. 
But  once  more  Europe  recovered  as  usual,  and  prospered 
for  a  few  years,  until  the  cotton  industry  was  almost  ruined 
by  the  effects  of  the  Civil  War  in  America.  A  "cotton 
famine"  occurred  in  Lancashire,  when  800,000  wage-earners 
were  deprived  of  their  livelihood. 

The  cotton  famine  of  1861  marks  another  epoch  in  the 
commercial  history  of  the  world.  It  was  one  of  the  most 
terrible  depressions  on  record.  Scherer  in  his  book,  "Cot- 
ton as  a  World  Power,"  gives  a  graphic  account:  "English 
cotton  manufacture  had  grown  to  such  enormous  propor- 
tions as  to  support  one-fifth  of  the  entire  population,  with  an 
annual  pay-roll  of  $55,000,000.  Over  a  thousand  million 
pounds  of  cotton  were  consumed  every  year,  producing  for 
exportation  2,800,000,000  yards  of  cloth  and  nearly  200,- 
000,000  pounds  of  twist  and  yarn.  There  were  2,650  fac- 
tories, of  which  2,195  were  localized  in  Lancashire  County 
and  on  the  borders  of  its  two  southern  neighbors,  these  fac- 
tories containing  over  30,000,000  spindles  and  350,000  looms 


HISTORY  OF  BUSINESS   DEPRESSIONS  61 

run  by  300,000  horsepower,  and  employing  nearly  half  a 
million  operatives,  of  whom  56  per  cent  were  females.  Be- 
fore the  close  of  the  year  1862,  485,454  of  the  inhabitants  of 
Lancashire  were  recipients  of  organized  charity." 

"The  cause  of  this  swift  and  appalling  catastrophe  is 
not  far  to  seek.  A  vast  population  in  a  limited  area  was 
dependent  for  its  daily  bread  on  the  cotton  industry.  During 
the  year  1860  America  furnished  84  per  cent  of  the  entire 
European  supply  of  cotton,  and  during  1862  only  7  per  cent, 
while  the  increased  imports  from  India  had  not  yet  had 
time  to  alleviate  the  situation  even  measurably,  and  the  de- 
mand for  cotton  in  the  northern  states  had  meanwhile  be- 
come so  intense  that  Liverpool  actually  re-exported  52,000 
bales  to  the  United  States  in  1862,  so  that  the  net  receipts 
from  America  were  less  than  1,000  bales  a  week,  as  against 
78,000  bales  in  1860." 

The  London  Times  on  December  7,  1861,  said:  "Christ- 
mas comes  this  year  on  a  country  bright  with  sun  and  frost, 
but  on  a  people  oppressed  with  a  national  loss  and  threaten- 
ed with  a  formidable  war.  Already  closed  mills  and  short 
time  have  given  some  part  of  our  population  an  earnest  of 
what  they  may  hereafter  expect;  already  speculation  is 
more  careful  than  it  has  been  for  many  years,  and  the 
comber  appearance  of  our  churches  and  chapels  last  Sunday 
portends  a  bad  season  next  spring." 

The  same  paper  said  a  fortnight  later:  "There  should 
have  arrived  by  this  time  at  the  southern  ports  of  America, 
for  shipment  to  England,  from  500,000  to  1,000,000  bales 
of  last  year's  cotton  crop.  By  the  latest  estimate  it  was 
calculated  that  not  1,000  bales  had  been  sent  down,  and  it 
was  known  indeed  that  small  stocks  of  cotton  remaining 
over  from  the  preceding  year's  crop  had  been  removed  from 
the  ports  to  the  interior  of  the  country." 

During  the  first  half  of  1862  only  11,500  bales  reached 
England  from  America,  less  than  a  hundredth  of  the  quan- 
tity for  the  same  period  of  the  year  preceding.  Half  of  the 
Lancashire  spindles  were  idle,  and  the  prices  had  jumped 
to  thirteen  pence  a  pound.  In  August  it  went  up  to  twenty 
pence,  and  in  the  following  month  to  a  half  crown. 

A  midsummer  issue  of  the  Saturday  Review  gives  a 
vivid  picture  of  the  crisis  at  its  height :  "The  cotton  famine 


62  HISTORY   OF  BUSINESS   DEPRESSIONS 

is  altogether  the  saddest  thing  that  has  befallen  this  country 
lor  many  a  year.  There  have  been  gloomy  times  enough 
before  this.  We  have  seen  Ireland  perishing  from  actual 
starvation,  and  England  half  ruined  from  commercial  dis- 
stress.  War  and  rebellion  have  taken  their  turn  among  the 
troubles  from  which  a  great  nation  can  scarcely  expect  to  be 
long  free.  But  in  the  worst  of  our  calamities  there  has  sel- 
dom been  so  pitiable  a  sight  as  the  manufacturing  districts 
present  at  this  moment." 

Continuing,  Scherer  says:  "By  the  close  of  that  awful 
year  the  resources  of  organized  charity  for  the  relief  of 
Lancashire  pauperism  had  been  exhausted,  and  alms  were 
trickling  in  from  Australia,  Canada,  India,  and  even  China. 
Nearly  a  quarter  million  operatives  were  entirely  out  of 
work,  while  only  121,129  were  working  full  time,  and,  as 
already  noted,  485,454  people  were  receiving  alms,  com- 
prising 24.1  per  cent  of  the  entire  population  affected." 

Richard  Cobden  wrote  from  Lancashire  in  November  to 
a  friend  in  Staffordshire:  "Few  people  can  realize  the 
appalling  state  of  things  in  this  neighborhood.  Imagine 
that  the  iron,  stone  and  coal  were  suddenly  withheld  from 
Staffordshire,  and  it  gives  you  but  an  imperfect  idea  of  what 
Lancashire,  with  its  much  larger  population,  is  suffering 
from  the  want  of  cotton;  it  reverses  the  condition  of  the 
richest  country  in  the  kingdom,  and  makes  it  the  poorest. 
A  capitalist  with  20,000  pounds  invested  in  buildings  and 
machinery  may  be  almost  on  a  par  with  his  operative?  in 
destitution,  if  he  be  deprived  of  the  raw  material  which 
alone  makes  this  capital  productive.  Unhappily,  the  winter  is 
upon  us  to  aggravate  the  sufferings  of  the  working  people." 

The  London  Times  of  December  31st  said :  "The  memory 
of  the  year  which  ends  this  day  will  hereafter  be  chiefly 
associated  with  the  American  war  and  its  consequences  at 
home.  No  crisis  in  modern  times  has  been  so  anxiously 
watched,  nor  has  any  European  war  or  revolution  so  seri- 
ously threatened  the  interests  of  England." 

This  was  the  final  climax  of  the  famine.  George  Mc- 
Henry  was  too  late  in  1863  with  his  book  on  "The  Cotton 
Trade,"  addressed  to  the  people  of  England  in  behalf  of  the 
Confederacy,  and  as  an  apology  for  slavery.  The  ma- 
chinery of  the  mills  had  been  adjusted  to  Surat  or  Indian 


HISTORY   OF   BUSINESS   DEPRESSIONS  63 

cotton,  of  which  1,179  bales  came  in  during  the  year,  to- 
gether with  increased  supplies  from  Egypt,  Turkey  and 
Brazil.  In  1864  the  supplies  from  India  proved  sufficient 
to  meet  the  demand,  and  the  weekly  number  of  applicants 
for  alms  was  reduced  to  135,000.  Surat  cotton  was  very 
unpopular,  however,  being  short,  harsh,  brittle,  and  one- 
third  less  than  normal  wages  were  paid;  so  that  many  of 
the  operatives  preferred  to  be  treated  as  paupers.  Ham- 
mond cites  reports  that  "the  word  Surat"  became  an  odious 
epithet  in  Lancashire,  so  that  a  firm  of  brewers  brought  a 
libel  suit  to  recover  damages  for  having  been  maligned  as 
"Surat  brewers,"  and  John  Bright  used  to  tell  a  story  of 
a  church-going  operative  who  once  interrupted  his  pastor's 
prayer  for  increased  cotton  supplies  with  the  fervent 
ejaculation,  "Amen,  O  Lord!  but  not  Shoorat!" 

In  1865  the  famine  ended,  having  cost  the  British  cotton 
trade  in  the  neighborhood  of  $350,000,000,  not  including 
about  $20,000,000  expended  by  the  public  in  alms.  Many 
mill  owners,  says  Ellison,  regained  a  part  of  their  losses, 
but  a  large  number  lost  nearly  everything  they  were  worth, 
while  many  were  reduced  to  bankruptcy. 

John  Bright,  always  an  active  friend  of  the  Union,  was 
astute  enough  to  write  to  Sumner,  during  the  height  of 
famine:  "This  country  is  passing  through  a  wonderful 
crisis,  but  our  people  will  be  kept  alive  by  the  contributions 
of  the  country.  I  see  that  some  one  in  the  States  has  pro- 
posed to  send  something  to  our  aid.  If  a  few  cargoes  of 
flour  should  come,  say  50,000  barrels,  as  a  gift  from  per- 
sons in  your  northern  states  to  the  Lancashire  working 
men,  it  would  have  a  prodigious  effect  in  your  favor  here." 
Three  relief  ships  accordingly  came  out  from  New  York 
to  Liverpool,  laden  with  bread,  meat,  and  flour,  a  gift  which, 
coming  as  it  did  from  "those  involved  in  the  real  agony  of 
war  to  those  for  whom  that  war  had  occasioned  distress, 
passing  though  sharp,  was  neither  unnoticed  nor  barren  of 
results." 


64  HISTORY   OF   BUSINESS   DEPRESSIONS 

France  also  suffered  in  the  cotton  famine,  consuming  as 
she  did  240,000,000  pounds  annually,  which  was  two-thirds 
as  much  as  America  itself  consumed.  All  their  cotton  came 
from  America  and  when  it  was  shut  off  300,000  people  in 
one  district  alone  were  made  absolutely  destitute,  subsist- 
ing, according  to  one  writer,  "by  roaming  at  night  from 
house  to  house,  and  demanding,  rather  than  asking,  alms." 
At  Rouin,  out  of  50,000  operatives  30,000  were  laid  off,  and 
in  the  surrounding  country  only  one-fifth  of  the  hand  weav- 
ers had  work. 

Conditions  were  so  bad  in  France  that  Louis  Napoleon, 
who  then  had  an  army  in  Mexico  under  Maximilian,  at- 
tempted to  induce  England  and  Russia  to  join  him  in  in- 
tervening in  the  American  war  on  the  side  of  the  South. 
In  America  the  cotton  famine  was  only  slightly  felt.  New 
England  mills,  of  course,  curtailed,  but  the  manufacture 
of  war  munitions  took  the  place  of  cotton  manufacturing 
in  giving  employment  and  stimulating  business. 

It  will  be  seen  that  for  three  decades  Europe  had  ex- 
perienced a  panic  regularly  every  ten  years,  beginning  1837, 
then  1847  and  1857.  Is  it  possible  that  her  people  were 
superstitious  enough  to  believe  that  another  would 
inevitably  come  in  1867  and  thus,  by  their  fear  and 
1  reparation  for  it,  cause  the  stringency  and  depression  of 
1 866  ?  It  is  reasonable  to  suppose  that  people  would  be  get- 
ting ready  a  year  ahead.  There  is  no  direct  evidence  that 
this  is  a  fact,  but  there  were  a  number  of  articles  going  the 
rounds  of  the  press  in  those  days  on  the  subject  of  the  recur- 
rence of  panics  and  depressions  every  ten  years.  It  came  a 
year  ahead  of  time,  in  1866,  when  the  financial  structure  of 
Great  Britain  was  shaken  by  failures  of  important  broker- 
age houses,  although  trade  itself  was  little  affected. 

The  crisis  of  1866  was  precipitated  by  the  failure  of  Over- 
and  &  Guerney  Company.  Again  it  was  the  result  of  over- 
speculation.  The  announcement  of  failure  was  followed 
by  what  is  referred  to  as  the  second  "Black  Friday"  of 
English  history.  The  Overand  &  Gurney  Company  had 


HISTORY   OF  BUSINESS   DEPRESSIONS  65 

liabilities  of  £19,000,000,  and,  with  the  exception  of  the 
Barings,  was  the  largest  brokerage  house  in  England.  Up 
to  this  time  this  was  the  largest  single  failure  in  commercial 
history.  A  number  of  other  banks  and  joint  stock  com- 
panies failed,  carrying  with  them  numerous  investors.  For 
some  months  after  the  panic  English  credit  fell  into  entire 
disrepute  on  the  Continent  and  a  circular  from  the  Foreign 
Office  containing  an  accurate  explanation  of  the  distinction 
between  scarcity  of  money  and  insolvency,  appeared  only 
to  aggravate*  the  prevailing  suspicion. 

The  disclosure  revealed  the  irregularity  and  unsoundness 
of  the  affairs  of  a  large  portion  of  the  English  business 
world,  and  it  was  some  years  before  confidence  was  fully 
restored.  Duguid  described  it  as  the  financial  crisis  of  the 
century.  Describing  the  second  "Black  Friday"  of  May  11, 
1866,  Andreadea  says:  "The  prevailing  excitement  is  in- 
describable; Lombard  Street  was  impassable,  it  seemed 
that  demands  for  accommodation  must  increase  to  an  ex- 
traordinary extent,  and  doubt  was  thrown  upon  the  position 
of  the  most  respected  houses.  On  this  day  alone  the  Bank  of 
England  made  advances  to  the  value  of  nearly  four  millions, 
and  its  reserve,  which  had  been  5,727,000  pounds  in  the 
morning,  was  reduced  to  about  three  millions." 

English  and  French  cotton  manufacturers  were  again 
upset  by  the  crisis  of  that  year.  During  the  Civil  War 
blockade,  when  these  countries  were  unable  to  get  sufficient 
cotton,  prices  had  practically  trebled.  Under  the  stimulus 
of  demand  India,  Egypt,  China  and  Brazil  began  growing 
cotton.  These  crops  reached  Europe  at  a  time  when  the 
released  crop  of  America  had  thrown  large  quantities  on 
the  market  and  a  crash  in  price  caused  great  disorganiza- 
tion in  the  cotton  trade,  which  was  reflected  in  all  other 
industries. 

Various  nations  of  Europe  have  at  times  attempted  to 
start  industries  which  were  not  adapted  to  their  people  or 
their  conditions,  and  as  cycles  of  depression  came  along 
these  industries  were  wiped  out.  England  attempted  to 


66  HISTORY  OF  BUSINESS  DEPRESSIONS 

establish  a  silk  industry,  but  trade  depression  wiped  it  out 
and  the  factories  for  cotton  spinning  and  weaving  in  Hol- 
land have  never  really  thrived  in  competition  with  Eng- 
land and  have  always  been  influenced  adversely  by  every 
depression  in  trade.  At  the  time  of  the  separation  Belgium 
tried  to  make  herself  industrially  independent  of  Holland, 
but  the  trade  depression  which  followed  wiped  out  these 
weaker  industries.  In  depressions  the  rule  of  the  survival 
of  the  fittest  seems  invariable.  Holland  survived  the 
monetary  crisis  of  1866,  when  confidence  was  tost  through- 
out Europe  and  interest  rates  were  8  per  cent  in  Amster- 
dam; when  shipbuilding  was  brought  to  a  standstill,  and 
colonial  trade  collapsed. 

The  panic  of  1873  swept  over  all  Europe,  America  and 
the  entire  world,  although  its  effect  was  felt  worse  on  the 
Continent  than  in  England.  Some  writers  describe  it  as 
"the  most  widespread  and  representative  of  all  crises." 
Brazil,  the  Argentine  Republic  and  Peru,  all  experienced  the 
distress,  as  well  as  the  countries  of  the  Orient.  For  sev- 
eral decades  the  nations  of  the  world  had  been  becoming 
closely  linked  together  by  commerce  and  trade  so  that  they 
were  all  affected  by  European  financial  troubles  at  times. 
Another  writer  says :  "The  crisis  of  1873  was  perhaps  the 
first  world-wide  depression  affecting  all  branches  of  trade, 
even  in  the  most  distant  countries  like  Australia  and  South 
America."  The  money  panic  was  felt  from  New  York  to 
Moscow,  affecting  trade,  commerce  and  agriculture  in  all 
the  intervening  countries.  It  is  supposed  that  the  panic 
started  in  Germany  as  a  result  of  over-speculation  follow- 
ing the  payment  of  enormous  indemnity  by  the  French  to 
their  conquerors.  Prices  were  inflated  on  every  European 
bourse,  and  when  the  crash  came  the  fall  in  securities 
on  the  Berlin  market  alone  was  estimated  at  131,138,000 
thalers. 

The  German  government  feared  the  results  of  over-specu- 
lation and  instructed  the  Bank  of  Prussia  to  refuse  the  paper 
of  new  joint  stock  companies.  The  speculators  transferred 


HISTORY  OF  BUSINESS  DEPRESSIONS  67 

their  operations  to  Vienna  and  in  the  first  quarter  of  1873 
$140,000,000  of  so-called  securities,  but  with  little  real 
security  behind  them,  were  issued  at  the  Austrian  capital. 
In  reality,  the  crash  in  Vienna  was  the  first  signal  of  ap- 
proaching disaster.  The  Bank  of  Austria  was  permitted 
to  lend  largely  on  such  securities  in  order  to  keep  the 
speculators  from  failure,  but  on  May  27th,  the  day  before 
the  opening  of  the  International  Exposition,  seventy  failures 
occurred,  and  on  the  next  day  one  hundred  and  ten,  involv- 
ing establishments  of  the  first  importance.  "The  bourse  was 
closed,  the  government  suspended  the  limit  upon  the  note 
issues  of  the  bank,  loans  were  made  by  the  treasury,  and 
a  syndicate  of  bankers  was  formed  to  make  advances  on 
sound  securities.  A  general  panic  was  thus  prevented,  but 
credit  was  so  far  impaired  that  it  was  not  until  1875  that 
business  in  Austria  resumed  its  wonted  activity."  France, 
having  been  forced  to  liquidate  in  1870,  after  the  Prussian 
War,  felt  only  the  ripples  of  the  crisis  which  were  wafted 
back  from  the  storm  in  other  countries. 

England  passed  through  another  short  depression  in  1875, 
when  a  number  of  large  concerns  failed,  including  several 
in  South  America  and  India,  but  the  Bank  of  England  got 
behind  the  situation  and  after  a  brief  shakeup  business 
resumed  its  normal  course. 

The  disturbance  of  1882  in  Europe  started  in  France  by 
the  failure  of  the  Union  Generale,  a  banking  institution 
founded  in  1878  as  an  adjunct  and  backed  by  the  Roman 
Catholic  Church,  being  devised  to  aid  her  members  as 
against  the  Jews  and  the  Unbelievers,  who,  through  a  series 
of  political  upturns,  had  secured  control  of  the  finances  of 
France.  M.  Eugene  Bontoux,  its  promoter,  was  in  a  class 
with  Law,  only  not  so  conscientious.  The  story  of  the 
Union  Generale  is  a  book  in  itself,  and  Zola  wrote  his  novel, 
"L'Argent,"  based  on  its  history.  "In  this  institution  was 
concentrated  the  money  of  the  Church,  its  institutions,  the 
hierachy,  and  its  followers.  At  first  it  succeeded  in  beat- 
ing the  Jews,  causing  one  of  the  French  Rothchilds  to  com- 


68  HISTORY   OF  BUSINESS  DEPRESSIONS 

mit  suicide,  but  gambling  in  its  stock  became  widespread 
and  the  crash  came  in  1882,  affecting  all  of  France  and 
spreading  to  neighboring  countries.  France  had  so  fully 
recovered  from  the  Franco-Prussian  War  that  stock-jobbing 
and  other  forms  of  reckless  speculation  flourished  in  Paris. 
Investment  companies  and  various  schemes  had  sprung  up 
like  mushrooms  in  the  speculative  atmosphere  of  the  pre- 
ceding years,  and  those  which  were  upon  too  grand  a  scale 
for  any  but  the  great  financiers  and  the  rich  had  their 
imitators  among  the  adventurers  of  the  street,  who  accepted 
gratefully  in  installments  the  petty  savings  of  the  poor." 
The  panic  started  in  Paris  and  Lyons  in  January,  1882,  with 
the  collapse  of  the  Union  Generale,  followed  by  a  fall  in  all 
classes  of  securities.  The  sum  of  £924,000  was  withdrawn 
from  the  Bank  of  England  for  France  on  January  30th,  and 
£2,000,000  was  drawn  out  during  the  week.  The  resultant 
liquidation  was  attended  by  much  loss  and  the  uncovering 
of  many  corrupt  financial  practices. 

Great  Britain  experienced  a  long  period  of  depression 
beginning  about  1875,  gradually  growing  worse  until  in 
1885  a  commission  was  appointed  to  investigate  the  causes 
and  means  for  business  recovery.  This  commission  took 
evidence  during  a  portion  of  the  years  1885  and  1886. 
"Questions  were  submitted  to  the  Chambers  of  Commerce, 
principal  business  men's  associations  and  labor  organiza- 
tions, calling  for  answers  upon  the  conditions  of  trade,  in- 
dustries and  wages,  during  a  period  of  twenty  years,  be- 
tween 1864  and  1884."  Various  causes  were  given  for  the 
depression,  but  as  usual  the  commission  reported  a 
multiplicity  of  suggestions  after  the  natural  course  had 
brought  about  some  relief.  The  commission  reported  that 
wages  had  held  up  and  the  incomes  of  business  and  profes- 
sional men  had  actually  increased,  although  profits  had  been 
smaller,  land  rents  lower.  The  causes  were  given  as  over- 
production and  keen  competition,  together  with  changing 
conditions  throughout  the  world,  particularly  as  to  rela- 
tions between  capital  and  labor. 


HISTORY   OF   BUSINESS   DEPRESSIONS  69 

The  year  1890  marked  the  famous  Baring  failure  in 
England,  which  started  in  Argentine.  In  Great  Britain, 
during  the  seven  years  preceding  the  disturbance,  the  trade 
and  industrial  situation,  although  differing  in  detail,  was 
practically  identical  with  developments  in  the  United  States 
during  the  same  period.  The  name  of  Baring  had  been 
closely  connected  with  the  financial  world,  and  held  in  high 
esteem  for  more  than  one  hundred  years.  At  one  time  they 
were  the  fiscal  agents  for  the  United  States  Government 
in  England.  They  were  a  strong  house  and  represented 
some  of  the  largest  financial  interests  in  foreign  countries. 
As  far  back  as  1819  the  Due  de  Richelieu  had  said :  "There 
are  six  great  powers  in  Europe — England,  France,  Russia, 
Austria,  Prussia  and  Baring  Brothers."  And  it  was  later 
on  the  loss  of  these  foreign  investments  that  the  firm  was 
wrecked.  It  was  their  Argentine  investments  which  got 
them  in  the  quicksands. 

On  account  of  the  prosperous  conditions  in  England  a 
considerable  percentage  of  the  population,  including  even 
laboring  classes,  had  been  able  to  accumulate  savings  which 
they  were  eager  to  place  in  some  remunerative  investment. 
The  successful  conversion  of  the  national  debt  of  Great 
Britain  during  the  year  1888  had  produced  a  considerable 
decline  in  the  rate  of  interest  and  had  stimulated  the  appe- 
tite of  the  public  for  new  investments.  The  firm  of  Baring 
Brothers  underwrote  Argentine  public  loans  and  disposed 
of  them  to  the  British  public.  Thirteen  Argentine  provinces 
during  the  period  1886-90  floated  securities  in  London  to 
the  extent  of  £38,700,000,  the  National  Government  nego- 
tiated loans  amounting  to  almost  £25,000,000,  and  Argen- 
tine municipalities  floated  about  £5,000,000  of  their  bonds  in 
London.  British  investors  also  placed  between  forty  and 
sixty  million  pounds  sterling  in  Argentine  railroad  projects, 
besides  an  equal  amount  in  miscellaneous  investments.  Dur- 
ing the  distress  a  total  of  765  firms  went  into  liquidation  in 
Great  Britain.  The  country,  however,  was  saved  from  a 
panic.  There  had  been  no  real  panic  since  1866,  when  by  the 


70  HISTORY  OF  BUSINESS   DEPRESSIONS 

banking  act  of  that  year  the  Bank  of  England  was  enabled 
to  assure  the  public  that  all  solvent  business  would  be  able 
to  secure  loans  to  carry  it  through  periods  of  distress. 

Money  had  been  poured  into  the  Argentine  Republic 
from  all  Europe  for  the  development  of  her  resources  until 
the  natives  might  have  well  though  their  credit  abroad  was 
without  limit.  A  boom  began  in  1866  which  "carried  up  the 
price  of  lands,  which  a  few  years  before  could  be  had  almost 
for  the  taking,  to  $50,000  per  league,  while  suburban  lots 
bounded  upward  from  a  few  cents  to  several  dollars  per 
square  metre.  Extravagance  and  luxury  ruled  among  the 
governing  classes,  and  the  banks  which  were  opened  in  1887 
under  the  Guaranteed  Banking  Law  advanced  money  with- 
out security  by  the  hundreds  of  thousands  to  men  of  promi- 
nence and  by  the  thousands  to  their  humble  followers." 

Germany  was  also  involved  in  the  Argentine  crisis,  a  total 
of  over  $88,000,000  worth  of  Argentine  securities  having 
been  floated  in  Germany.  It  was  this  period  of  heavy  in- 
vestments and  establishing  branches  of  German  banks  in 
Argentine  that  was  later  reflected  in  the  World  War  when 
German  interests  succeeded  in  keeping  the  moral  influence 
of  Argentine  on  the  side  of  Germany.  Germany  recovered 
from  the  Argentine  crisis  very  quickly,  the  rate  of  discount 
at  the  Reichsbank  reaching  only  51/2  per  cent. 

France  was  scarcely  affected  by  the  catastrophe.  It  was 
many  years  before  conditions  in  the  Argentine  Republic  re- 
turned to  normal  and  her  business  recovered  its  balance. 

The  first  shock  of  the  crisis  of  1893  was  felt  in  Australia, 
where  great  headway  had  been  made  and  people  were  fast 
piling  up  wealth,  based  mostly,  however,  on  highly  inflated 
valuations.  The  United  States  was  next,  and  from  here  the 
shock  was  communicated  to  Berlin  and  Vienna.  Italy  was 
also  affected  by  the  prevailing  distrust  and  France  saw  her 
importations  shrink  from  4,767,867,000  francs  ($920,000,- 
000)  in  1891  to  3,936,720,000  francs  ($760,000,000)  in 
1893.  Even  Turkey  suffered  in  the  widespread  depression 
because  of  the  fall  in  prices  and  lessened  demand  for  her 


HISTORY  OF  BUSINESS  DEPRESSIONS  71 

products.  In  no  country,  however,  was  depression  felt 
as  badly  as  in  the  United  States. 

The  collapse  of  business  in  Australia  in  1893  was  one  of 
the  most  severe  ever  recorded  in  any  country.  Large  sums 
of  capital  had  been  poured  into  that  country  from  Europe 
and  the  natives  made  the  mistake  of  thinking  it  was  a  part 
of  the  accumulation  of  their  own  wealth.  This  year,  when 
the  time  came  to  pay  interest,  difficulties  were  faced.  The 
Australian  banks  were  plunged  deeply  into  land  loans  which 
could  not  quickly  earn  returns,  and  as  Europe  was  no  longer 
willing  to  send  new  money  to  take  the  place  of  the  interest 
withdrawn,  serious  stringency  was  created.  The  signal  of 
the  actual  crash  came  on  January  29th,  when  the  Federal 
Bank  of  Melbourne  failed.  The  other  banks  attempted  to 
create  the  impression  that  this  failure  was  due  anyhow  and 
simply  cleared  the  atmosphere  and  left  the  others  still 
stronger,  but  withdrawal  of  deposits  began  against  all  banks 
and  one  after  another  stopped  payment,  among  them  the 
English  and  Australian  Bank,  with  91  branches,  and  the 
London  Charter  Bank  with  58  branches.  Altogether  four- 
teen large  institutions  failed  with  aggregate  deposits  of 
£85,000,000. 

England  again  felt  derangement  in  business  in  1895, 
following  the  inflation  of  the  Boer  War.  The  war  had 
drained  Britain,  and  her  consols  declined  to  such  an  extent 
that  the  Government  was  sorely  puzzled.  The  depression 
was  not  lengthy,  however,  and  in  two  years  business  had  re- 
covered its  stride.  The  German  industrial  crisis  of  1901 
probably  was  confined  to  that  country.  Our  crisis  of  1903 
followed  this  industrial  upheaval  in  Germany  and  the  one  in 
England  in  1902. 

Turkey  has  been  very  backward  in  modern  business, 
although  she  has  experienced  periods  of  prosperity  and 
depression  along  with  other  countries.  Turkey's  people  are 
very  suspicious  and  distrustful,  and  do  not  like  paper  money. 
In  1894  some  counterfeit  bank  notes  were  found  in  circula- 
tion and  a  rush  was  made  on  the  Imperial  Ottoman  Bank 


72  HISTORY  OF  BUSINESS   DEPRESSIONS 

to  redeem  the  notes,  a  total  of  $1,000,000  being  presented 
within  a  week. 

In  1907  the  Imperial  Bank  of  Germany  was  put  to  a 
severe  test,  not  merely  as  a  reflex  of  the  crisis  of  the  United 
States,  but  of  the  pressure  from  excessive  demands  at  home, 
due  to  expansion  and  speculation.  The  commerce  of  Aus- 
tria was  particularly  affected  in  this  crisis.  In  1907  the 
Bank  of  Spain  was  the  only  institution  in  Europe  that  did 
not  raise  its  discount  rate.  That  year  the  Bank  of  France 
sent  part  of  its  gold  to  London  to  counteract  the  effects  of 
the  American  crisis. 

Japan  led  the  recent  depression  when  her  financial  panic 
broke  in  May,  1920.  This  spread  to  one  country  after  an- 
other until  the  whole  civilized  world  was  in  the  throes  of 
depression  with  the  possible  exception  of  defeated  Germany. 

Europe  felt  the  depression  about  as  much  as  did  the 
United  States.  Great  Britain  had  more  men  out  of  em- 
ployment in  proportion  to  population.  The  stagnation  was 
felt  throughout  the  world,  the  Orient  and  South  America 
being  particularly  affected,  and  Scandinavia  and  Denmark 
suffered  seriously.  France  was  less  affected  than  any  other 
country  in  Europe.  Germany  stimulated  an  artificial  pros- 
perity which  may  finally  end  in  utter  collapse.  In  Holland 
most  trading  companies  suffered  heavy  losses,  and  only  by 
the  most  conservative  administration  kept  their  capital  in- 
tact. The  Dutch  banks  were  generally  wise  enough  to  keep 
ample  reserves  from  their  years  of  enormous  profits  to  tide 
over  the  period  and  no  important  failures  were  reported. 
Denmark's  trade  was  severely  depressed  because  of  German 
competition.  Other  Scandinavian  countries  suffered  from 
the  same  conditions.  The  shipping  of  the  North  European 
countries  was  badly  affected.  The  unemployment  in  these 
countries  took  on  a  serious  aspect,  presenting  a  problem  of 
grave  proportions,  the  paper,  textile,  glass  and  shoe  indus- 
tries of  the  Scandinavian  countries  being  particularly  af- 
fected by  German  competition.  A  very  notable  change  be- 
gan in  1921,  when  England  took  the  first  steps  to  gain 


HISTORY   OF  BUSINESS   DEPRESSIONS  73 

control  of  its  war-time  currency  notes.  The  minimum  of 
£368,200,000  outstanding  in  December,  1920,  had  been  re- 
duced to  £316,000,000,  or  nearly  15  per  cent  during  the 
year.  The  paper  money  issues  of  the  Bank  of  France,  which 
in  November,  1920,  were  39,600,000,000  francs,  had  been 
reduced  2,500,000,000  francs  within  ten  months.  Consider- 
ing how  gradual  the  process  of  currency  contraction  has 
been  in  the  past,  this  certainly  was  a  remarkable  achieve- 
ment. 

The  financial  chaos  was  so  widespread  that  cancellation 
of  international  debts  was  seriously  discussed  in  all  coun- 
tries. Along  this  line  Alexander  D.  Noyes,  financial  editor 
of  the  New  York  Times,  recently  said:  "England  was 
declared  to  be  on  the  road  to  ruin  half  a  dozen  times  during 
the  century  of  costly  wars  which  ended  with  the  Battle  of 
Wataerloo.  .  .  .  France  was  declared  'economically 
ruined'  three  times  within  two  centuries.  She  had  not  only 
been  depleted  of  men  and  treasure  by  the  disastrous  cam- 
paigns of  Louis  XIV.,  of  Napoleon,  and  of  the  Franco-Prus- 
sian war,  but  on  all  three  occasions  she  lost,  like  Germany, 
great  portions  of  her  national  domain.  France  paid  so- 
called  impossible  indemnities.  History  after  1720  and  1815 
and  1871  is  an  open  book." 


CHAPTER  V 
DEPRESSIONS  OF  THE  COLONIAL  PERIOD 

Religious  persecution  has  probably  been  played  up  too 
much  by  historians  as  influencing  the  colonization  of 
America.  It  was  economic  distress  prevailing  in  Europe 
and  the  efforts  of  men  to  get  a  living,  more  than  any  other 
one  thing,  that  caused  immigrants  to  come  to  America. 
This  country  offered  a  great  attraction  to  the  industrious 
settler,  who  was  assured  an  independent  existence  owing  to 
the  great  quantity  of  free  land  to  be  had  practically  for  the 
asking.  Capital  was  not  required  to  finance  agriculture  as 
is  the  case  today,  for  the  reason  that  the  pioneer  with  little 
or  no  money  could  set  itself  up  and  earn  a  living  from 
the  very  beginning. 

In  the  earliest  times,  since  there  was  no  paper  money, 
credit  was  not  easily  inflated.  Gold  and  silver  were  fairly 
scarce,  so  that  very  little  business  was  done  in  money  trans- 
action, and  fortunate  was  the  colonist  who  could  get  hold 
of  enough  specie  to  buy  necessary  tools  brought  over  from 
Europe.  Barter  was  resorted  to  and  certain  staple  com- 
modities were  declared  by  law  to  be  legal  tender  in  payment 
of  debts.  Furthermore,  a  jail  sentence  was  imposed  upon 
debtors  so  that  the  borrower  measured  well  his  prospects 
for  payment  before  going  in  debt. 

The  first  money  of  the  early  colonies  was  wampum,  the 
currency  the  Indians  used,  but  it  was  found  inadequate  for 
the  growing  needs.  While  wampum  money  was  nothing 
but  white  and  black  beads  made  from  shells,  yet  it  had  a 
definite  value  the  same  as  gold  or  silver  money  have.  It 
was  not  fiat  money,  as  is  generally  supposed,  because  it 
was  redeemable  among  the  Indians  in  beaver  skins  and 
these  had  a  definite,  stable  value  in  Europe.  The  decline  of 
the  beaver  trade  brought  wampum  money  into  disrepute. 


HISTORY  OF  BUSINESS   DEPRESSIONS  75 

When  it  ceased  to  be  exchangeable  in  large  sums  for  an  ar- 
ticle of  international  trade  the  basis  of  its  value  was  gone. 

While  in  these  pioneer  times  there  were  periods  of  keen 
distress,  there  were  no  long  continued  and  widespread 
depressions  such  as  we  began  to  experience  later,  because 
there  was  little  speculation  and  over-production.  Over- 
production was  impossible  when  the  producer  lived  next'N 
door  to  the  consumer  and  knew  his  wants.  Even  the  manu- 
facturer, who  was  the  country  shoemaker  and  village  black- 
smith, knew  exactly  how  many  pairs  of  shoes  the  townspeople 
would  want  and  how  many  plows  the  farmers  would  need. 

There  must  have  been  at  least  a  financial  stringency  in 
the  year  1649  when  a  student  at  Harvard,  later  president 
of  the  college,  "settled  his  bill  with  'an  old  cow/  and  the 
accounts  of  the  construction  of  the  first  college  building 
include  the  entry,  'Received,  a  goat  30s.  plantation  of  Water- 
town,  which  died/  "  As  the  population  of  the  colonies  grew 
wider  business  relations  became  necessary,  and  with  it 
came  a  demand  for  capital  with  which  to  develop  the  latent 
resources  of  the  country.  This  agitation  brought  the  Pine 
Tree  Shilling,  which  was  designed  to  take  the  place  of  the 
Spanish  coins  in  circulation  and  to  serve  in  the  place  of 
"country  pay/'  which  was  simply  an  exchange  of  farm  com- 
modities, the  price  of  which  was  set  by  the  town  judge  or  in 
similar  manner.  The  coinage  of  Pine  Tree  Shillings  was 
started  in  1652,  but  this  coin  soon  depreciated  in  value  and 
their  minting  was  stopped  by  order  of  the  Crown  in  1684. 

At  various  times  the  colonies  were  depressed  by  acts  of 
the  English  government,  which  gave  trade  and  industry 
severe  setbacks.  In  1651  it  was  enacted  that  the  colonies 
should  export  only  to  England  such  products  as  they  had 
to  sell  and  that  they  should  send  them  only  in  English  built 
ships.  "In  1697  the  exportation  of  wool  yarn,  or  woolen  man- 
ufactures, to  any  place  whatever  was  prohibited.  In  1719 
the  House  of  Commons  condemned  all  American  manufac- 
tures as  tending  to  independence.  In  1732  the  exportation 
of  hats  was  forbidden ;  and  in  1750  rolling  mills,  iron  fur- 


76  HISTORY  OF  BUSINESS   DEPRESSIONS 

naces,  and  forges  were  declared  nuisances  to  be  suppressed 
by  the  colonial  governors." 

According  to  Hinsdale:  "The  finest  pine  trees  in  the 
forests  were  marked  with  the  'broad  arrow,'  denoting  that 
they  had  been  selected  as  masts  for  the  King's  ships,  and 
that  they  must  not  be  cut  by  the  lumbermen.  Even  Lord 
Chatham  said  that  in  a  probable  contingency  he  would 
not  allow  the  colonists  to  make  a  hobnail."  The  year  1666 
was  a  year  of  greatly  depressed  trade  which  was  so  bad 
that  the  colonies  of  Maryland,  Virginia  and  Carolina  made 
a  treaty  under  which  they  all  agreed  to  stop  planting  tobacco 
for  one  year  in  order  to  raise  the  price. 

The  first  general  depression  which  swept  through  the  col- 
onies as  a  whole,  so  far  as  records  show,  was  in  1669.  "The 
'glorious  revolution'  of  that  year  did  not  bring  the  results 
that  the  people  had  wished,  although  a  new  charter  had 
been  won,  but  the  friction  between  colonial  and  home  gov- 
ernment almost  immediately  became  greater  than  ever,  be- 
cause many  of  the  most  pressing  needs  of  the  colonists  were 
ignored,  and  the  Americans  felt  obliged  to  help  themselves. 
The  business  situation  in  the  colonies  was  worse  than  it 
had  been  for  a  long  time.  Indian  troubles  at  home  and 
wars  in  Europe  interfered  with  commerce  and  the  help  they 
should  have  had  from  England  did  not  come.  Moreover, 
the  West  Indies,  with  which  the  colonies  had  so  much  to  do, 
were  far  from  prosperous.  The  people  of  the  Massachusetts 
Bay  Colony  were  the  first  to  devise  a  scheme  to  remedy  the 
money  troubles ;  they  believed  that  if  these  could  be  helped, 
the  commercial  situation  could  not  fail  to  improve.  The 
immediate  cause  of  the  legislation  was  the  scarcity  of 
money  and  the  necessity  of  meeting  the  expenses  of  the  wars 
with  the  Indians.  An  issue  of  paper  money  was  authorized, 
the  first  on  the  Western  Continent,  as  a  means  of  relief. 

"In  1683  an  extraordinary  series  of  occurrences  grew  out 
of  the  low  prices  of  tobacco.  Many  people  signed  petitions 
for  a  cessation  of  planting  for  one  year  for  the  purpose  of 
increasing  the  price.  As  the  request  was  not  granted,  they 


HISTORY   OF  BUSINESS   DEPRESSIONS  77 

banded  themselves  together  and  went  through  the  country 
destroying  tobacco  plants  wherever  found." 

Another  big  depression  occurred  in  1690.  Massachusetts 
issued  paper  money  to  put  out  an  expedition  against  Quebec. 
Bills  of  credit  were  issued  to  the  amount  of  $40,000,  which 
sum  was  used  mainly  to  pay  the  soldiers.  The  movement 
was  frustrated  and  this  money  also  depreciated  in  value 
until  it  was  brought  up  to  par  by  the  governor  of  the  colony 
making  it  legal  tender  for  taxes.  New  York  and  Penn- 
sylvania soon  followed  in  issuing  paper  currency.  Later 
Rhode  Island,  Connecticut  and  New  Hampshire  resorted  to 
this  expedient  and  finally  the  southern  colonies.  By  1750 
the  paper  money  of  Massachusetts  had  depreciated  to  one- 
half  of  its  face  value  in  silver.  The  country  was  flooded 
with  issues  of  twelve  distinct  colonies,  resulting  in  hopeless 
confusion.  General  business  depression  followed.  There 
were  few  banks  then,  and  those  that  did  exist  were  private 
in  character  and  under  no  governmental  regulation  or  con- 
trol whatever.  A  pamphleteer  of  1690  said,  "Silver  in  New 
England  is  like  the  water  of  a  swift  running  river — always 
coming  and  as  fast  going  away." 

In  1710  trade  was  adversely  affected  in  the  Province  of 
Virginia,  and  there  was  much  hardship  on  account  of  the 
confusion  of  coins  in  circulation.  Such  heavy  discounts 
were  exacted  that  "the  General  Assembly  fixed  the  value  of 
the  coins  of  Peru,  Mexico,  Portugal,  Flanders  and  other 
countries,  and  made  the  penalty  for  refusal  to  take  them  a 
loss  of  the  debt.  It  was  even  necessary  to  enact  a  similar 
law  to  save  the  copper  coins  of  the  mother  country  from 
ruinous  discount." 

In  1714  John  Colman,  a  merchant  of  Boston,  proposed 
a  scheme  for  the  establishment  of  a  bank  as  a  "remedy  for 
the  existing  embarrassment  of  trade."  All  colonies  issued 
paper  money,  and  they  all  suffered  from  the  results. 

In  1722  a  notable  industrial  depression  swept  the  colony 
of  Pennsylvania.  There  was  little  currency  and  great  dis- 


78  HISTORY  OF  BUSINESS   DEPRESSIONS 

couragement.  The  people  had  no  money  with  which  to  buy, 
shops  were  deserted  and  many  people  were  leaving  Phila- 
delphia. The  farmers'  crops  were  reduced  to  the  lowest 
value.  "All  the  European  goods  imported,  as  well  as  the 
bread  and  flour  or  country  produce,  were  bought  up  and 
engrossed  at  a  low  price  by  a  cabal  of  only  four  or  five 
rich  men,  who  retailed  them  again  on  credit  at  what  rate 
they  pleased,  taking  advantage  of  the  people's  necessities 
and  circumstances.  By  this  means  they  soon  got  the  whole 
country  into  their  debt,  exacting  bonds  of  everybody  at 
8  per  cent." 

The  year  1740  is  another  one  of  marked  depression.  That 
was  the  year  of  the  legislation  in  England  against  the 
colonies  issuing  paper  money.  The  depreciation  was  so 
great  that  every  department  of  business  and  industry  was 
affected.  (That  year  sterling  exchange  in  Massachusetts  was 
quoted  at  550). 

Pelathiah  Webster,  a  merchant  of  Philadelphia,  writing 
about  conditions  which  existed  in  1741,  said:  "We  have 
suffered  more  from  this  than  from  every  other  cause  of 
calamity;  it  has  killed  more  men,  pervaded  and  corrupted 
the  choicest  interests  of  our  country  more,  and  done  more 
injustice  than  even  the  arms  and  artifices  of  our  enemies." 

A  pamphlet  of  1743  speaks  of  the  bills  of  credit  in  New 
England  issued  on  loan  "to  themselves,  Members  of  the 
Legislature,  and  to  other  Borrowers,  their  Friends,  at  easy 
and  fallacious  Lays,  to  be  repaid  at  very  long  Periods ;  and 
by  their  provincial  Laws  made  a  Tender  in  all  Contracts, 
Trade  and  Business,  whereby  Currencies,  various  and 
illegal,  have  been  introduced  which  from  their  continued 
and  depreciated  nature  in  the  Course  of  many  years  have 
much  oppressed  Widows  and  Orphans  and  all  other 
Creditors." 

In  1748  New  England  again  sent  an  expedition  against 
Louisburg,  a  fortress  on  the  Island  of  Cape  Breton.  The 
expedition  was  successful,  but  again  too  much  paper  money 


HISTORY   OF  BUSINESS   DEPRESSIONS  79 

was  issued  and  depression  followed  when  it  depreciated  ten 
to  one.  This  was  the  last  paper  money  issued  until  the 
Revolution,  as  Parliament  had  already  voted  to  enforce  the 
"Bubble  Act"  in  the  colonies,  which  prohibited  the  issuance 
of  paper  money.  Despite  their  experience,  the  colonies 
liked  paper  money.  It  was  demanded  in  all  colonies  and  all 
made  the  error  of  issuing  too  great  an  abundance.  Natu- 
rally, this  led  to  depressions  when  periodical  house-cleaning 
of  finances  came  around.  Much  of  the  paper  was  never 
redeemed,  being  a  total  loss  to  the  holders.  All  through 
our  history  we  have  had  a  peculiarity  that  stands  out  among 
all  the  nations  of  the  world  in  that  paper  money  was  always 
popular  with  us.  The  denial  of  the  right  to  make  paper 
money  was  not  the  least  of  the  grievances  which  led  to  the 
Revolution.  One  of  the  first  things  the  Continental  Con- 
gress did  was  to  authorize  an  issue  of  paper  money.  Long 
before  Cornwallis  surrendered  to  Washington  at  Yorktown 
"continental  paper  money  had  depreciated  to  the  value  of 
75  to  1,  and  during  the  formation  of  the  Union  fell  to  1000 
to  1  and  then  expired,  but  the  people,  satisfied  with  gaining 
their  freedom,  suffered  the  result  without  a  murmur." 

The  years  preceding  the  Revolution  found  no  organized 
activities  in  our  banking  or  industrial  system.  An  eco- 
nomic depression  prevailed  during  the  decade  prior  to  the 
Revolution.  This  was  due  to  the  fact  that  the  colonies 
depended  largely  on  foreign  trade  for  their  prosperity, 
which  was  adversely  affected  by  the  enforcement  of  the  un- 
popular English  measures  and  from  the  colonies'  retaliatory 
policy  of  non-importation.  The  depression  of  this  period 
was  accentuated  by  the  "Sugar  Act,"  which  practically 
destroyed  the  lucrative  business  of  rum  distilling  in  New 
England,  together  with  other  branches  of  the  trade  con- 
nected with  it.  Dissatisfaction  over  existing  conditions 
lurked  in  every  corner,  and  a  large  element  of  the  people 
inflamed  by  "hard-times"  agitators,  ranged  in  a  body  on 
the  side  of  the  Revolution.  This  depression  set  in  in  1764 
and  lasted  through  to  the  outbreak  of  the  Revolution.  It 


80  HISTORY  OF  BUSINESS   DEPRESSIONS 

had  more  to  do  with  the  Revolution  than  has  ever  been 
recorded  in  history. 

The  Colonists  had  outlived  the  barter  days  of  their  early 
history.  They  demanded  a  medium  of  money  exchange  out- 
side of  the  English  specie,  distribution  of  which  was  con- 
trolled from  the  other  side  of  the  water.  There  is  no  doubt 
but  that  the  English  government  aided  in  bringing  about 
the  depressed  economic  conditions  because  of  the  spirit  of 
revolt  that  was  growing  in  America.  England  naturally 
did  not  want  the  Colonies  to  build  up  a  monetary  system  of 
their  own.  It  might  later  be  used  to  finance  a  revolu- 
tion ;  therefore  the  decree  against  the  issue  of  colonial  paper 
money.  Students  of  economic  history  agree  that  the  plan 
on  which  this  paper  money  was  issued  was  financially  sound 
in  principle,  which  fact  cemented  some  of  the  more  con- 
servative element  with  the  radicals.  When  the  war  broke 
out  the  Colonists  had  been  through  a  long  period  of  depres- 
sion. They  had  no  accumulation  of  wealth  to  fall  back  on 
and  no  system  of  money  of  their  own  with  which  to  finance 
the  conflict.  The  Continental  Congress  was  only  an  emer- 
gency body  with  little  authority  and  no  compelling  power, 
yet  at  the  beginning  of  hostilities  this  congress  authorized 
the  first  issue  of  paper  money  to  an  amount  equivalent  to 
two  million  pounds.  A  total  of  $241,552,780  of  this  paper 
money  was  issued.  As  the  amount  was  so  enormous  for 
those  times,  and  greatly  in  excess  of  the  actual  needs  of  the 
people,  the  different  states  failed  to  support  their  credit 
and  the  bills  began  early  and  rapidly  to  depreciate.  The 
Continental  paper  dollar  fell  to  the  value  of  two  or  three 
cents  in  silver,  and  at  that  time  an  expression  synonymous 
of  utter  worthlessness,  "Not  worth  a  'continental"  was 
started — an  expression  that  we  still  hear  to  this  day. 

Thus  did  our  colonial  ancestors  experience  these  cycles 
of  business  in  their  repeating  monotony,  the  same  as  we  of 
the  Twentieth  Century. 


CHAPTER  VI 
CRISES,  PANICS  AND  DEPRESSIONS  DEFINED 

In  our  national  history  there  has  been  twenty-one  major 
business  depressions.  In  addition,  there  have  been  nu- 
erous  local  disturbances  or  temporary  setbacks  that  might 
be  classed  as  minor  depressions.  Those  described  in  this 
book,  however,  are  the  ones  which  carried  business  below 
the  normal  line  as  shown  by  official  statistics.  Various 
writers,  sometimes  for  a  particluar  end,  have  ascribed  cer- 
tain depressions  to  certain  years,  but  the  unfailing  truth 
of  statistics  does  not  bear  them  out.  Some  claim  that  we 
had  business  depressions  in  such  years  as  1867,  1882  and 
1900,  but  the  most  authoritative  statistics  show  them  to  be 
normal  years. 

Our  eagerness  to  make  progress,  and  our  constantly  in- 
creasing population,  make  it  sometimes  appear  that  we  are 
having  depression  when  in  reality  statistics  show  that  we 
are  only  standing  still.  When  we  are  passing  through 
normal  times  we  do  not  seem  to  know  it;  our  mind  wants 
to  tell  us  that  we  are  in  one  state  or  another,  either  boom  or 
depression.  When  times  are  not  actually  booming,  we  think 
they  are  depressed.  Such  is  the  American  spirit. 

We  probably  have  the  most  severe  depressions  in  this 
country  because  of  our  inane  desire  to  make  money  rapidly, 
or  in  the  language  of  the  street,  "to  get  rich  quick."  There- 
fore we  take  long  chances,  emboldened  by  examples  which 
we  see  on  every  hand.  We  live  in  the  only  country  in 
the  world  where  a  person  can  make  a  million  over  night,  so 
to  speak.  A  large  element  of  our  business  people  believe 
that  liberality  pays  and  that  we  can  make  money  by  spend- 
ing money.  A  foreigner  who  visited  us  said  we  are  a  great 
people  because  "we  spend  more  accidentally  than  we  do  on 
purpose."  Our  individualism  leads  to  recklessness.  Then 


82  HISTORY  OF  BUSINESS   DEPRESSIONS 

when  some  untoward  incident  happens  the  bubble  bursts 
and  we  are  called  to  account  by  the  natural  order.  It  can 
be  seen,  however,  that  we  are  getting  over  our  individualism 
to  some  extent.  Our  government  is  becoming  more  paternal, 
and  we  lean  more  and  more  on  our  neighbor  and  co-operate 
more  extensively  with  our  competitor.  The  gambling  ele- 
ment in  our  business  is  being  routed  to  some  extent.  We 
demand  greater  stability  in  business,  and  with  this  move- 
ment we  are  eliminating  many  panics  and  making  depres- 
sions less  violent  and  destructive.  The  ambition  of  the 
average  American  is  in  the  direction  of  money.  Money 
brings  him  power.  A  generation  back  the  spectaicular 
American  would  risk  his  last  dollar  on  the  chance  to  win 
big  stakes,  and  when  he  failed  he  carried  many  others  with 
him.  In  recent  years  there  have  been  some  changes  in 
this  procedure  because  the  rest  of  us  do  not  care  to  be  pulled 
down  by  the  gambler,  and  his  tactics  are  being  disclosed 
and  discounted. 

The  best  definition  of  what  we  call  a  commercial  cycle  is 
given  by  Lord  Overstone :  "A  state  of  quiescence ;  improve- 
ment; growing  confidence;  prosperity;  excitement;  over- 
trading ;  convulsions ;  pressure ;  stagnation ;  distress ;  ending 
again  in  quiescence." 

The  progress  of  the  world  and  the  advancement  of  civiliza- 
tion has  gone  forward  in  rising  and  receding  waves.  The 
world  has  been  afflicted  with  economic  convulsions  at  pe- 
riods the  same  as  it  has  been  with  war  and  pestilence.  The 
phenomenon  of  national  or  world  depression  may  be  likened 
to  the  "blues"  which  come  over  most  individuals.  The 
great  writer,  Defoe,  in  1728  said :  "The  prosperity  of  a  na- 
tion rises  and  falls  just  as  trade  is  supported  or  decayed." 

A  panic  is  a  sudden  outbreak  or  fit  of  hysteria  in  financial 
circles.  It  is  a  frantic  effort  to  get  hold  of  money  either 
by  withdrawing  deposits  or  selling  securities  for  fear  of 
loss. 

A  crisis  is  a  brief  period  of  acute  strain  and  may  be 
either  financial  or  commercial;  financially,  because  of  a 


HISTORY  OF  BUSINESS   DEPRESSIONS  83 

stringency  in  the  money  market  and  commercially,  because 
of  uncertainty  from  various  underlying  causes. 

A  depression  is  a  state  of  lowered  vitality  of  more  or  less 
lengthy  duration  in  financial  or  commercial  circles  or  both. 
Usually  depression  is  brought  about  as  a  result  of  panic  or 
crisis,  although  that  rule  is  not  invariable.  A  panic  breaks 
suddenly,  although  it  may  have  been  smouldering  for  a  long 
while,  only  waiting  for  a  match  to  touch  it  off.  A  crisis  is 
the  peak  of  a  multiplicity  of  troubles  which  have  come  to  a 
head.  If  a  crisis  is  not  promptly  and  properly  met,  it  will 
break  out  in  panic,  but  with  the  proper  application  it  will 
pass  off  without  affecting  the  industrial  structure  to  any 
great  extent.  Crises  occur,  as  a  rule,  at  the  height  of 
periods  of  great  activity  and  speculation.  They  usually 
mark  the  close  of  such  periods  and  the  coming  of  depres- 
sions. 

The  literal  definition  of  the  word  "depression"  is:  state 
of  dullness  or  inactivity ;  a  protracted  season  when  business 
falls  below  normal.  A  depression  is  a  decrease  in  the  rate 
of  production  in  wealth,  both  by  lack  of  power  to  buy  by 
one  class  and  unwillingness  to  buy  by  another  class. 

Sometimes  we  recover  from  depression  quicker  when  it 
is  accompanied  by  a  panic,  because  when  the  financial 
structure  is  threatened  all  the  resources  available  to  the 
Government  are  thrown  into  the  breach  and  the  currency 
is  placed  where  it  will  do  the  most  good  and  bring  quicker 
relief.  Where  no  panic  accompanies  depression  it  is  often 
allowed  to  wear  itself  out,  which  is  a  long  and  painful  pro- 
cess. Business  depressions  are  not  necessarily  the  out- 
growth of  panics  or  money  stringency,  although  with  few 
exceptions  they  have  followed  that  phenomenon.  In  the 
short  depression  of  1914,  as  a  recent  instance,  there  was 
neither  panic  nor  money  stringency,  but  purely  an  un- 
certainty which  prevailed  on  account  of  the  outbreak  of  the 
European  war.  A  crisis  often  marks  the  culmination  or 
turning  point  from  expansion  to  liquidation  and  accompany- 
ing depression.  It  is  the  result  of  the  use  or  abuse  of  capital 


84  HISTORY   OF  BUSINESS   DEPRESSIONS 

leading  to  exhaustion  of  funds.  Webster  describes  crisis  in 
this  manner :  "The  point  of  time  when  it  is  decided  whether 
any  affair  or  course  of  action  must  go  on  or  be  modified  or 
terminate;  a  state  in  which  a  decisive  change  one  way  or 
the  other  is  impending;  specifically,  a  time  of  difficulty, 
danger  and  suspense  in  commerce  or  finance." 

An  essayist  on  the  subject  says:  "Unless  new  resources 
are  placed  in  the  breach  crisis  will  lead  to  panic.  In  1907 
the  United  States  Treasury  was  too  late  in  coming  to  the 
rescue  of  the  New  York  banks,  which  caused  a  panic.  The 
crisis  of  that  year  occurred  several  months  before  the  panic 
broke  in  October." 

A  crisis  is  something  we  will  always  have,  but  with 
proper  legal  and  economic  safeguards  provided,  the  danger 
can  be  avoided  through  the  same  process  as  the  signal  system 
on  a  railroad.  We  should  have  reached  a  station  now  where 
we  can  safeguard  against  panics  by  being  prepared  for  such 
crises  as  unlocked  for  conditions  might  bring  about.  While 
there  can  be  crises  without  panic,  there  can  be  neither  crises 
nor  panics  without  depression,  either  local  or  general. 

Panics  do  not  necessarily  bring  general  depression.  We 
have  had  many  panics  that  have  passed  away  without  affect- 
ing more  than  the  financial  centers,  and  these  only  temporar- 
ily. Some  of  them  never  got  on  the  first  page  of  the  news- 
papers. As  to  whether  or  not  a  panic  will  lead  to  depression 
depends  upon  whether  its  force  has  broken  the  credit  struc- 
ture. If  the  prosperity  phase  of  the  cycle  has  not  run  its 
course,  and  inflation  has  not  reached  its  height,  a  panic  will 
have  little  effect  on  business  in  general.  If,  however,  it  hap- 
pens at  a  time  when  inflation  and  speculation  have  run  ram- 
pant, and  the  elasticity  of  credit  has  reached  its  limit,  then 
depression  will  result  because  there  are  no  resources  at  hand 
to  stem  the  evil  effects. 

The  depressions  of  1837,  1857,  1869,  1873,  1893  and  1907 
started  with  panics.  Such  depressions  as  1809,  1819,  1847, 
1914,  1920  were  not  accompanied  by  panics,  although  they 
set  in  following  crises. 


HISTORY   OF   BUSINESS   DEPRESSIONS  85 

From  medical  science  we  learn  that  anything  that  stimu- 
ulates  the  heart  will  bring  an  indirect  reaction.  The  same 
may  be  said  of  our  economic  life. 

Bagehot  expresses  it  well:  "At  intervals  .  .  .  the 
blind  capital  of  a  country  is  particularly  large  and  craving ; 
it  seeks  for  some  one  to  devour  it,  and  there  is  'plethora;' 
it  finds  some  one,  and  there  is  'speculation' ;  it  is  devoured, 
and  there  is  panic." 

Panics,  crises  and  depressions  are  often  interlocked.  Back 
of  the  entire  structure  of  business,  however,  is  money,  and 
some  details  of  money  panics  and  crises  here  are  given  when 
they  are  directly  responsible  for  'the  depression  of  the 
period.  Only  those  panics  directly  bearing  on  trade  de- 
pressions are  recorded  here.  England  has  had  no  panic 
since  1866,  although  she  has  had  a  number  of  severe  and  proj 
tracted  industrial  depressions.  Not  even  the  Baring  failure 
of  1890  caused  a  panic. 

Men  writing  of  their  day  unanimously  say  that  the  people 
were  in  much  better  condition  to  withstand  the  shock  of  the 
depression  about  which  they  wrote  than  were  those  of  pre- 
vious times.  This  shows  that  as  the  decades  go  by  we  have 
at  least  made  some  progress  in  softening  the  blow,  spread- 
ing the  periods  of  frequency  and  preparing  resources  to 
withstand  the  strain.  Depressions  run  their  course  in  all 
countries.  France  particularly  suffered  from  depressions 
at  the  end  of  the  Eighteenth  and  beginning  of  the  Nine- 
teenth Centuries.  Had  we  not  declared  our  independence 
when  we  did,  it  is  doubtful  whether  we  would  have  received 
any  help  from  France.  After  her  war  with  England,  which 
was  raging  during  our  revolutionary  period,  France's 
finances  were  in  such  a  condition  as  a  result  of  a  terrific 
depression  that  it  is  a  practical  certainty  she  would  have 
been  unable  to  render  us  any  help  whatever. 

All  writers  agree  that  the  most  severe  depressions  o6cur 
in  countries  whose  business  is  highly  developed,  and  this  is 
obviously  true  because  there  is  more  money  in  circulation, 
more  commodities  and  securities  changing  hands  and,  there- 


86  HISTORY   OF  BUSINESS   DEPRESSIONS 

fore,  more  possibility  for  wide  fluctuation.  In  the  older 
countries,  such  as  France,  Germany  and  Italy,  depressions 
have  been  less  violent  than  in  America,  which  was  new 
and  on  a  more  speculative  basis.  For  one  hundred  and  fifty 
years  previous  to  1844  England  experienced  the  most  des- 
perate panics.  Her  money  then  was  placed  on  a  sound  basis 
and  the  government  practically  took  control  of  the  Bank 
of  England.  They  have  not  suspended  specie  payment 
since  that  time. 

In  the  world-wide  depression  of  1920  Japan  was  the  only 
important  country  that  experienced  an  actual  old-fashioned 
panic.  This  was  no  doubt  because  of  the  fact  that  her  finan- 
cial system  lacked  a  sound  basis  and  her  inflation  was  so 
extraordinary  that  a  panic  was  inevitable  when  the  turn 
came.  A  country  in  a  state  of  rapid  development  is  more 
exposed  to  fluctuations  than  an  older  country  whose  values 
have  become  stabilized  over  a  long  period  of  years. 

Consular  reports,  as  filed  with  the  Department  of  Com- 
merce in  Washington,  reveal  business  depressions  in  every 
country  at  different  times,  or  at  the  same  time.  Business 
depressions  usually  follow  the  accumulation  of  idle  capital 
in  the  banks  in  the  form  of  deposits,  the  swelling  of  the  cash 
reserves,  and  the  reduction  of  commercial  loans. 

Newton  believed  that  the  voluntary  actions  of  men  en 
masse  are  subject  to  the  Law  of  Action  and  Reaction.  Says 
a  contemporary:  "We  look  upon  a  mob  as  the  last  thing 
which  would  work  in  accordance  with  scientific  law,  but 
psychologists  tell  us  that  the  mob  is  one  of  the  best  illustra- 
tions of  Newton's  Law  of  Action  and  Reaction." 

There  is  more  in  that  than  one  would  credit  on  first 
thought.  Men's  minds  follow  the  spirit  of  the  times,  but 
what  creates  that  spirit  often  requires  deep  study  to  ascer- 
tain. We  know  that  we  have  the  phenomena  of  political 
uprisings,  racial  upheavals,  the  rise  and  passing  of  social 
fads  or  fashions.  These  pass  away  and  oftentimes  look  fool- 
ish to  us  afterward.  The  phenomenon  of  the  business  cycle 
affects  our  minds  in  the  same  way.  When  a  spirit  of  pros- 


HISTORY   OF  BUSINESS   DEPRESSIONS  87 

perity  prevails,  people's  minds  run  in  that  direction  and 
they  are  entirely  over-sanguine.  Then  the  tide  turns,  they 
lose  confidence,  and  all  people  talk  about  is  disaster.  We 
saw  a  perfect  example  of  this  in  1920.  There  was  no  panic, 
no  untoward  incident,  but  a  variety  of  small  local  conditions 
that  started  men  talking  hard  times.  Early  in  1920  the 
highest  peak  had  been  reached;  buyers  were  determined 
that  they  would  not  pay  the  exorbitant  prices  asked.  It 
therefore  was  to  their  interest  to  talk  hard  times  and  pre- 
dict depression  so  as  to  bear  the  market.  This  may  not 
have  been  a  major  cause  of  the  depression,  but  it  all  had  its 
psychological  effect  and  spread  rapidly,  and  actual  condi- 
tions followed  the  thoughts  that  were  in  the  minds  of  the 
people. 

Waves  have  come  over  the  United  States  that  historians 
now  look  back  upon  and  find  almost  inexplicable.  They  sim- 
ply must  be  attributed  to  a  state  of  mind,  a  mania  that  ex- 
isted at  the  time.  Admittedly,  if  we  have  these  periodical 
social  phenomena,  there  may  be  something  to  the  claim  that 
we  can  have  economic  phenomena  as  a  result  of  a  peculiar 
state  of  mind.  We  can  readily  see  where  theorists  have 
some  foundation  to  stand  on  when  they  point  out  that  na- 
ture is  in  itself  a  succession  of  waves.  The  tides  of  the 
ocean  have  never  been  explained ;  epidemics  appear  and  re- 
appear ;  religions  take  hold  of  people  and  die  out.  Who  can 
explain  the  Salem  witchcraft,  if  it  was  not  purely  a  craze 
that  temporarily  affected  the  minds  of  the  people?  How  can 
we  account  for  the  waves  of  resentment  that  swept  our 
country  in  its  early  years,  at  one  time  against  the  Quakers, 
again  against  the  Baptists,  still  later  the  Anti-Masonic  out- 
breaks, the  "Know-Nothings,"  the  Ku-Klux  Klan,  or  Anti- 
Catholic  movements  ?  Such  phemomena  have  swept  through 
our  history  from  time  to  time ;  they  could  not  be  explained 
at  the  time  and  have  never  been  explained  since.  But  busi- 
ness and  financial  panics  are  not  altogether  the  result  of 
fear  or  a  state  of  mind.  There  are  deep  underlying  condi- 
tions which  must  be  met  by  real  action. 


88  HISTORY   OF  BUSINESS   DEPRESSIONS 

It  has  been  a  practice  since  the  days  of  the  Mississippi 
Bubble  to  legislate  against  business  depression,  and  from 
time  to  time  legislation  has  helped.  Hard  times  will  almost 
invariably  turn  a  poltical  party  out  of  power.  Statesmen 
have  repeatedly  promised  on  the  stump  relief  from  distress, 
and  after  getting  into  office  have  taken  the  stand  that  eco- 
nomic conditions  could  not  be  changed  by  legislation. 

In  times  past  economists  have  gone  to  a  great  deal  of 
trouble  in  writing  books  and  articles  on  the  causes  of  de- 
pression, and  many  were  quite  sure  that  they  had  found  the 
seat  of  all  the  trouble.  Today,  causes  they  attributed  are  en- 
tirely removed  and  yet  we  still  have  depressions.  A  century 
and  a  quarter  ago  Adam  Smith  insisted  that  the  production 
and  importation  and  exportation  of  corn  was  the  one  con- 
trolling barometer  of  business.  He  said,  "the  money  price 
of  corn  regulates  that  of  all  other  home-made  commodities." 

In  my  opinion,  Ricardo,  himself  a  successful  business 
man,  wrote  far  better  on  economic  questions  than  Adam 
Smith,  whose  admittedly  classic  works  are  the  bible  of 
theoretical  economists. 

History  indicates  that  we  have  a  general  depression  on 
an  average  of  every  nine  or  ten  years,  some  more  severe 
than  others.  Sandwiched  in  between,  about  every  five  years, 
there  has  been  a  minor  depression  or  temporary  setback. 
Statistics  prove  that  business  has  never  remained  below 
normal  for  more  than  three  years,  and,  on  an  average,  only 
a  year  and  a  half.  While  production  is  shown  not  to  remain 
below  normal  for  more  than  this  average,  it  may  remain  at 
normal  for  three  or  four  years,  after  which  time  great  up- 
ward strides  are  made  and  a  boom  usually  sets  in. 

Our  panics  have  usually  occurred  in  the  Fall  of  the  year 
when  finances  are  ordinarily  strained  on  account  of  crop- 
moving  demands.  The  crises  of  1837,  1847,  1857,  1873, 
1890  and  1907  all  occurred  in  the  Fall.  The  minor  crises 
nearly  all  occurred  in  the  Spring,  breaking  out  in  March  and 
May.  It  stands  to  reason  that  there  is  no  accurate  regu- 
larity as  to  the  time  of  arrival  of  depressions,  because  if 


HISTORY  OF  BUSINESS   DEPRESSIONS  89 

that  were  true  safeguards  could  be  taken  that  would  to 
some  extent  eliminate  depressions. 

One  of  the  most  interesting  stories  bearing  on  this  subject 
is  that  told  by  a  Chicago  real  estate  man,  which  gives  the 
history  of  a  quarter  acre  of  land  in  the  heart  of  Chicago. 
The  story  tells  of  its  original  value  at  $20.00  in  1830,  when 
Chicago  had  a  couple  of  hundred  people,  and  how  it  rose 
and  declined  through  the  vicissitudes  of  boom  and  panic, 
each  succeeding  wave  of  good  times  carrying  it  higher  and 
making  it  more  valuable,  reaching  a  value  of  $1,250,000  in 
the  nineties  and  probably  two  or  three  times  that  today. 

One  early  European  writer  referred  to  America  as  a  back- 
ward country,  giving  his  opinion  that  backward  countries 
which  produce  raw  material  largely  for  export  felt  depres- 
sions far  more  than  manufacturing  countries.  He  said: 
"The  specialization  impressed  upon  a  backward  country  by 
commerce  with  advanced  industrial  countries,  confining  it 
to  growing  cotton  or  wheat  or  sheep  or  wine,  exaggerates 
the  irregularity  imposed  by  nature  upon  its  productivity, 
by  making  it  subservient  to  the  fluctuating  demands  of  dis- 
tant and  wholly  incalculable  markets." 

There  is  no  one  outstanding  cause  of  depressions,  unless  it 
be  speculation,  and  all  crises  can  hardly  be  laid  to  the  door 
of  this  evil.  We  have  had  depressions  caused  by  war,  cur- 
rency inflation,  political  changes,  and  many  other  causes. 
One  panic,  that  of  1857,  was  caused  largely  by  too  much  gold. 
This  will  probably  be  a  revelation  to  the  average  citizen, 
because  in  our  day  we  have  heard  so  much  of  lack  of  money 
as  a  cause  of  depressions.  The  discovery  of  gold  in  Califor- 
nia in  1848  flooded  the  country  with  great  quantities  of  gold 
until  it  became  cheap.  This  gold  reached  the  East  in  such 
abundance  that  it  brought  about  a  development  far  beyond 
the  needs  of  the  country  at  the  time.  These  new  enterprises, 
together  with  needless  numbers  of  new  banks,  could  not 
pay  dividends,  with  the  result  that  confidence  was  under- 
mined and  panic  ensued.  However,  this  is  the  only  depres- 
sion on  record  caused  by  too  much  gold.  In  practically  all 


90  HISTORY  OF  BUSINESS   DEPRESSIONS 

of  the  others  the  question  of  too  little  gold  entered,  unless  an 
exception  might  be  made  in  the  depression  of  1920,  when 
we  had  so  much  gold  that  the  exchange  rate  was  decidedly 
against  us,  causing  us  great  loss  of  foreign  trade.  Periods 
of  abundant  gold  have  their  handicaps  the  same  as  periods 
of  lack  of  gold  have  theirs. 

In  classifying  our  depressions  five  can  be  attributed  to 
financial  panics,  and  these  are  the  worst  in  our  history. 
These  were  in  1819,  1837,  1857,  1893  and  1907.  They 
brought  the  most  far-reaching  effects  because  confidence  in 
the  financial  system  itself  was  shaken.  When  people  lose 
confidence  in  the  value  of  the  currency  that  is  handed  them 
in  payment  for  labor  or  commodities,  it  takes  a  long  time  to 
recover.  In  each  of  these  periods  a  new  system  of  money 
had  to  be  adopted  and  the  old  financial  system  reorganized. 

Herbert  Hoover  recently  said  there  had  been  fourteen 
depressions  since  the  Civil  War.  No  doubt,  included  in  that 
number  were  some  minor  crises  that  were  largely  confined 
to  Manhattan  Island.  The  old  idea  that  Wall  Street  is  a 
barometer  of  the  business  of  the  country  has  long  been  ex- 
ploded and,  to  a  large  extent,  its  manipulations  have  but  lit- 
tle effect  on  the  balance  of  the  country. 

The  history  of  our  nation  has  not  been  the  steady  tri- 
umphal march  so  often  depicted,  but  an  irregular  growth  in- 
terspersed with  periods  of  depression  in  length  equal  to 
those  of  prosperity. 


CHAPTER  VII. 
THE  DEPRESSION  OF  1785-89 

Following  the  Revolutionary  War,  the  country  went 
through  an  experience  similar  to  that  following  the  late 
World  War.  For  the  three  years  1782,  1783  and  1784,  fol- 
lowing peace,  conditions  were  fairly  prosperous  because  of 
the  reaction  from  the  strain,  the  jubilant  feeling  of  victory, 
and  as  a  result  of  war  demands  and  the  comparatively  abun- 
dant specie  left  in  the  country  by  the  British  and  French 
armies.  But  this  was  not  to  last  long.  The  brief  period 
of  over-trading  led  to  the  depression  of  1785  to  1789.  The 
specie  quickly  left  the  country  for  payment  of  imported 
goods,  and  industry  and  commerce  were  hampered  by  the 
absence  of  a  good  monetary  system. 

They  also  suffered  severely  from  the  falling  prices  and 
the  loss  of  the  markets  that  were  now  more  than  adequately 
supplied,  as  regards  many  articles,  by  importations  from 
Europe,  mainly  from  England.  Not  only  did  peace  in  Eng- 
land and  other  European  countries  affect  our  exports  ad- 
versely, but  what  wealth  we  had  was  soon  spent  in  supply- 
ing our  urgent  needs  from  those  countries. 

American  merchants  had  become  embarrassed  and  were 
unable  to  pay  for  the  goods  they  had  bought  on  credit.  The 
position  of  both  producers  and  traders  in  the  United  States 
was  made  much  worse  by  the  closing  of  the  British  West 
Indies  to  American  shipping.  In  1785  the  panic  came.  The 
monetary  situation  was  deplorable,  not  only  because  the  coin 
had  been  exported  to  pay  for  imported  goods,  but  also  from 
the  fact  that  the  Confederation  had  no  authority  to  coin 
money  and  to  establish  a  uniform  system  of  currency. 

Politically  and  economically  that  was  the  gravest  crisis 
in  American  history.  Both  the  government  and  the  people 
were  bankrupt.  There  was  no  money  to  pay  the  ministers  to 


92  HISTORY   OF  BUSINESS   DEPRESSIONS 

foreign  countries,  and  they  actually  had  to  beg  the  foreign 
governments  for  funds.  It  was  made  a  part  of  their  duties 
as  envoys  to  solicit  loans  without  security  for  their  govern- 
ment and,  incidently,  for  their  own  expenses. 

Franklin  attempted  to  borrow  from  France  and  got  only 
insignificant  sums.  France  was  having  her  own  economic 
troubles  that  year,  which  were  brought  to  a  climax  by  bad 
crops  and  the  scarcity  of  metallic  money. 

A  petition  addressed  to  Congress  by  the  tradesmen  and 
manufacturers  of  the  town  of  Baltimore  represented  the 
sentiment  of  the  manufacturing  sections  of  the  country : 

"Since  the  close  of  the  late  war,  and  the  completion  of  the 
Revolution,  they  have  observed  with  serious  regret  the  man- 
ufacturing and  the  trading  interest  of  the  country  rapidly 
declining,  and  the  attempts  of  the  State  Legislatures  to 
remedy  the  evil  failing  of  their  object;  that,  in  the  present 
melancholy  state  of  our  country,  the  number  of  poor  in- 
creasing for  the  want  of  employment,  foreign  debts  accumu- 
lating, houses  and  lands  depreciating  in  value,  and  trade 
and  manufactures  languishing  and  expiring,  they  look  up  to 
the  Supreme  Legislature  of  the  United  States  as  the  guar- 
dian of  the  whole  empire,  and  from  their  united  wisdom  and 
patriotism,  and  ardent  love  of  their  country,  expect  to  de- 
rive that  aid  and  assistance  which  alone  can  dissipate  their 
just  apprehensions,  and  animate  them  with  hopes  of  suc- 
cess in  future,  by  imposing  on  all  foreign  articles  which  can 
be  made  in  America  such  duties  as  will  give  a  just  and  de- 
cided preference  to  their  labors;  discountenancing  that 
trade  which  tends  so  materially  to  injure  them  and  impov- 
erish their  country ;  measures  which,  in  their  consequences, 
may  also  contribute  to  the  discharge  of  the  national  debt  and 
the  due  support  of  the  Government." 

John  Jay  wrote:  "Our  commerce  was  then  (before  the 
Revolution)  confined  to  Great  Britain.  We  were  obliged  to 
carry  our  commodities  to  her  market  and,  consequently,  sell 
them  at  her  price;  we  were  compelled  to  purchase  foreign 
commodities  at  her  stores  and  on  her  terms,  and  were  for- 
bidden to  establish  any  manufactures  incompatible  with  her 
view  of  gain.  In  future  the  whole  world  will  be  open  to  us, 
and  we  shall  be  at  liberty  to  purchase  from  those  who  will 


HISTORY   OP   BUSINESS   DEPRESSIONS  93 

sell  on  the  best  terms  and  to  sell  to  those  who  will  give  us  the 
best  prices." 

No  country  is  prosperous  with  trade  balances  so  largely 
against  her,  and  it  is  little  wonder  that  American  business 
suffered  at  this  period  with  a  heavy  trade  balance  against 
her.  During  this  period,  known  as  the  Industrial  Revolu- 
tion in  England,  that  country  had  come  into  possession  of 
many  marvelous  inventions  which  gave  her  an  advantage 
over  our  manufacturers  in  producing  cheaply. 

It  was  during  this  period  of  depression  that  the  first  eff ort 
was  made  on  behalf  of  the  distressed  "Infant  Industries"  to 
secure  a  protective  tariff  against  foreign  competition.  The 
second  act  passed  by  Congress  under  the  new  constitution 
on  July  4,  1789,  opens  with  the  preamble,  "Whereas,  it  is 
necessary  for  the  support  of  the  government,  for  the  dis- 
charge of  the  debts  of  the  United  States,  and  for  the  en- 
couragement and  protection  of  manufacturers  that  duties 
be  laid  on  goods  and  wares  and  merchandise  imported  lo- 
cally." Thus  was  the  beginning  of  protection  for  the  ex- 
press purpose  of  "encouragement  and  protection  of  manu- 
facturers." 

The  country  was  flooded  with  foreign  goods,  largely  from 
England.  The  industrial  isolation  during  the  war,  as  well 
as  the  demand  for  material  for  sustaining  the  army  and 
navy,  gave  a  decided  stimulus  to  the  struggling  manu- 
facturers of  the  colonies.  Many  iron  works  and  other 
manufacturers  were  called  into  existence,  and  in  some 
cases  were  given  encouragement  by  a  system  of  bonuses. 
Upon  the  resumption  of  imports  these  industries  suffered 
immediate  and  disastrous  setbacks.  Many  were  not  firmly 
established  and  were  forced  out  of  existence.  In  1784 
the  imports  from  England  amounted  to  £3,679,000 
and  in  1785  to  £2,308,000.  These  goods  largely  took  the 
place  of  those  manufactured  in  the  states  during  the  war. 
To  make  matters  worse,  the  exports  fell  off  proportionately 
to  a  large  extent,  as  against  an  average  of  £1,045,000  dur- 


94  HISTORY   OF  BUSINESS   DEPRESSIONS 

ing  the  ten-year  period  before  the  war  they  dropped  to 
£749,000  in  1784  and  to  £894,000  in  1785. 

Following  the  war,  starting  in  1781,  in  spite  of  previous 
disastrous  experience,  seven  of  the  states  again  plunged 
into  the  issuing  of  paper  money.  This  money,  of  course, 
depreciated  in  value  to  almost  nothing,  and,  in  fact,  this 
depreciation  helped  the  already  depressed  conditions,  and 
the  resentment  was  such  that  when  the  Constitution  was 
adopted,  the  emission  of  bills  of  credit  as  legal  tender  by  the 
states  was  forbidden  and  an  end  was  put  to  the  issue  of 
government  paper  money  for  seventy  years.  The  loss  of 
the  West  India  trade  amounted  to  £1,537,664.  This  was 
caused  by  an  Act  of  Parliament  which  excluded  American 
vessels  from  the  West  Indian  trade,  by  admitting  only 
British  built  and  manned  vessels.  The  economic  prosperity 
of  the  states  depended  largely  upon  our  trade  with  the 
West  Indies,  and  its  loss  was  a  third  important  factor  in  the 
depression  of  that  period.  Such  were  the  stagnant  condi- 
tions of  business  in  the  states  at  that  time  that  it  is  little 
wonder  that  predictions  were  freely  made  in  England  that 
the  new  government  would  never  survive.  The  Revolution 
was  primarily  a  struggle  for  commerce,  and  tactics  of  Great 
Britain  through  trade  and  navigation  laws  largely  destroyed 
our  foreign  commerce  for  some  years  after  independence 
was  won. 

In  1787  a  Philadelphia  man  came  into  possession  of  two 
carding  and  spinning  machines  which  were  supposed  to 
save  the  labor  of  one  hundred  and  twenty  men  a  day.  These 
machines  were  purchased  by  an  agent  of  a  British  manu- 
facturer and  shipped  back  to  Liverpool,  the  object  being  to 
nip  American  manufacturing  in  the  bud. 

Bolles  says:  "The  hostility  to  American  manufacturing 
was  manifested  in  another  way  during  the  same  period. 
Experiments  were  then  rife  for  introducing  the  cotton-plant 
into  the  country.  Whether  the  English  manufacturer  at 
that  early  day  foresaw  the  adaptation  of  the  plant  to  the 
climate  and  soil,  we  do  not  know,  but,  with  the  vain  hope  of 


HISTORY  OF  BUSINESS   DEPRESSIONS  95 

destroying  its  cultivation,  and  preventing  its  manufacture, 
a  considerable  quantity  of  cotton-seed  was  purchased  and 
burned  in  Virginia  by  a  British  agent.  The  same  spirit 
continued  for  years,  and  was  exhibited  in  many  unexpected 
and  exasperating  ways  to  the  American  manufacturer." 

"It  is  notorious,"  says  Niles,  "that  immediately  after  the 
close  of  the  Revolutionary  War  great  sums  of  money  were 
expended  to  destroy  our  flocks  of  sheep  and  ruin  our  rising 
manufacturers.  They  bought  up  and  immediately  slaugh- 
tered great  numbers  of  that  useful  animal,  and  spared  no 
expense  to  send  'home'  the  few  artisans  who  had  struggled 
hither,  with  their  machines  and  implements  of  trade." 

The  depreciated  Continental  currency  augmented  the  de- 
moralization of  business.  The  immense  profits  that  were 
anticipated  from  Independence  were  far  from  realized.  The 
non-intercourse  with  foreign  countries  during  the  war  had 
involved  merchants  and  shipbuilders  in  financial  embar- 
rassment. Independence  placed  us  outside  the  British  Navi- 
gation Act  and  deprived  us  of  the  commercial  advantages 
hitherto  accorded  American  vessels  in  British  ports,  so  that, 
in  addition  to  our  depreciated  currency  and  lack  of  a  definite 
financial  foundation,  we  were  faced  with  the  problem  of 
building  anew  our  foreign  trade. 

European  manufacturers  accumulated  stocks  which  they 
were  ready  to  dispose  of  at  25  per  cent  below  London  prices 
in  order  to  regain  their  American  trade.  "Ships  filled  with 
sail  duck  and  linen  from  Holland  and  Russia,  muslins  and 
silks  from  India  and  China,  thronged  our  ports  and  found 
eager  buyers  among  the  wealthy  Americans  who  had  been 
deprived  of  these  luxuries  during  the  war.  Such  a  trade 
balance  of  $18,397,335  worth  of  imports  against  $3,746,725 
worth  of  exports  was  bound  to  bring  depression  because 
the  difference  had  to  be  made  good  in  gold  and  silver,  which 
could  not  be  spared." 

The  feature  of  the  depression  of  this  period,  with  its  at- 
tendant economic  chaos,  was  the  emigration  of  people  from 
the  seaboard  over  the  mountains  into  the  Central  West, 
where  a  cheap  living  and  a  new  start  in  life  were  possible. 


96  HISTORY  OF  BUSINESS   DEPRESSIONS 

That  the  laborer  should  take  advantage  of  this  situation 
to  better  his  lot  in  a  new  country  was  only  natural.  This  is 
in  direct  contrast  to  the  depressions  of  the  later  part  of  the 
Nineteenth  Century,  when  the  reverse  was  the  rule :  the  new 
settlers  of  the  newer  parts  of  the  West  finding  no  market  for 
their  products  and  the  mortgages  threatening  foreclosure 
returned  to  their  old  homes  in  the  East,  where  they  were 
among  friends  and  relatives.  The  migration  westward  had 
a  beneficial  effect  in  aiding  depressed  conditions,  by  bring- 
ing about  a  scarcity  of  skilled  labor  and  other  wage  earners. 
Those  remaining  began  to  receive  increased  pay.  This 
condition  was  confined  almost  entirely  to  the  North.  The 
agriculturists  of  both  the  North  and  the  South  were  able 
to  produce  or  secure  the  necessities  of  life,  the  standard  of 
living  being  low.  There  were  few  of  extreme  wealth  and 
few  in  extreme  poverty. 

The  payment  of  bounties  was  one  of  the  means  adopted 
in  different  states  to  aid  industry  and  trade  to  recover  from 
the  depression.  "New  York  gave  liberal  bounties  on  hemp ; 
New  Jersey  gave  similar  assistance  to  wool,  flax  and  hemp ; 
Maryland  encouraged  salt  production,  and  Georgia  assisted 
the  producers  of  hemp,  flax  and  wheat." 

Fiske  describes  conditions  in  his  Critical  Periods  of  Amer- 
ican History:  "The  War  of  Secession  (Revolution)  was  a 
terrible  ordeal  to  pass  through,  but  when  one  tries  to  picture 
what  might  have  happened  in  this  fair  land  without  the 
work  of  the  Federal  Convention  the  imagination  stands 
aghast.  Certainly  it  cannot  be  too  strongly  insisted  that 
the  winning  of  the  Revolutionary  War  did  not  establish  the 
liberties  of  the  American  people ;  it  merely  cleared  the  path 
for  their  establishment." 

The  depression  of  the  period  was  a  large  element  in  the 
ratification  of  the  Constitution.  There  was  a  strong  paper 
money  partly  in  all  of  the  states  who  feared  that  if  the 
states  were  federated  they  would  not  be  permitted  to  issue 
paper  money.  In  reading  the  history  of  debates  in  the  dif- 
ferent states  on  the  question  of  ratification,  it  is  noted  that 


HISTORY  OF  BUSINESS   DEPRESSIONS  97 

the  principal  point  at  issue  was  the  best  means  to  relieve 
the  existing  distress.  New  York  ratified  because  she  feared 
economic  pressue  from  New  Jersey  and  Connecticut.  Dela- 
ware was  the  first  to  ratify  because  she  had  a  big  trade  with 
Philadelphia.  But  it  was  still  a  serious  question  whether 
the  Union  would  ever  be  perfected  because  of  the  attitude 
of  Virginia,  which  finally  ratified  by  a  very  narrow  vote. 
There  was  a  strong  movement  in  Virginia  to  withdraw  from 
the  Confederation  and  join  Spain  through  an  alliance,  as 
shown  in  a  letter  from  Wilkinson  to  Governor  Miro,  of 
Louisiana:  "I  can  give  you  the  solemn  assurance  that  I 
found  all  the  men  belonging  to  the  first  class  of  society  in 
the  district,  with  the  exception  of  Colonel  Marshall,  our 
surveyor,  and  Colonel  Muter,  one  of  our  judges,  decidedly 
in  favor  of  separation  from  the  United  States  and  of  alliance 
with  Spain." 

New  Hampshire  demurred  from  ratification  for  some  time 
on  the  paper  money  issue,  as  shown  from  the  following  ex- 
tract : 

"There  are  perhaps  (if  it  could  be  impartially  known) , 
three-quarters  at  least,  and  more  likely  seven-eights  of  the 
people  so  fractious  and  discontented  as  to  wish  paper  money 
on  loan  may  be  made  by  government  to  give  a  spring  to 
commerce  and  agriculture  .  .  .  extreme  disorders  re- 
quire extreme  medicines  as  their  remedies.  Paper  money, 
or  even  leather  buttons,  when  stamped  by  authority  and 
funded  with  realities,  will  answer  for  internal  commerce  as 
well  as  silver  and  gold." 

New  Hampshire  furnished  quite  a  number  of  men  for 
Shay's  Rebellion. 

Further  borrowing  at  home  or  abroad  was  almost  impos- 
sible; requisitions  were  of  slight  avail;  domestic  creditors 
were  thoroughly  alarmed.  Furthermore,  the  depression 
lasted  much  longer  than  was  expected.  The  hopes  of  the 
new  states  were  very  slow  in  being  realized.  It  was  the 
economic  stress  of  the  times  that  prompted  Alexander 
Hamilton  to  start  gathering  statistics  for  his  memorable 
report  on  manufactures.  Had  it  not  been  for  the  genius  of 


98  HISTORY  OF  BUSINESS  DEPRESSIONS 

Hamilton  the  commercial  future  of  our  country  would  have 
been  dark  indeed.  Hamilton  took  hold  and  established  a 
reasonably  sound  financial  system  which  gained  the  con- 
fidence of  the  business  communities,  and  industry  was 
helped  to  regain  its  feet.  It  required  ten  years  to  get  our 
industries  on  any  kind  of  a  stable  basis  and  start  a  general 
upward  trend. 

Before  the  war  the  fishing  industry  had  given  employ- 
ment to  the  largest  number  of  people,  but  it  was  virtually 
destroyed,  and  the  people  who  had  formerly  depended  upon 
it  for  their  livelihood  were  reduced  to  destitution  and 
misery. 

"For  a  time  the  coastwise  trade  prospered,  but  before 
long,  in  common  with  the  other  branches  of  trade,  it  expe- 
rienced a  severe  depression.  Credit  everywhere  was  im- 
paired, there  was  little  money,  and  the  various  states,  jealous 
and  fearful  of  the  commercial  prosperity  of  one  another, 
began  to  erect  barriers  that  crippled  the  commerce  of  all. 
New  York  attempted  to  break  up  the  trade  of  Connecticut 
and  New  Jersey  by  imposing  heavy  fees  on  every  vessel  en- 
tering from  those  states.  Delaware  and  New  Jersey  tried  to 
attract  to  their  ports  the  foreign  trade  of  Pennsylvania  and 
New  York  by  a  system  of  legislation  offering  lower  import 
duties  and  more  favorable  trade  regulations.  When  Massa- 
chusetts and  Rhode  Island  placed  almost  prohibitive  duties 
on  imports  carried  in  British  ships,  Connecticut  admitted 
such  imports  free,  hoping  to  obtain  a  monopoly  of  do- 
mestic trade  in  British  products.  Several  of  the  states  im- 
posed heavy  duties  on  goods  from  all  other  states  with  the 
two-fold  object  of  encouraging  domestic  production  and  of 
conserving  the  supply  of  coin." 

In  those  days  even  the  mails  were  of  little  aid  to  business, 
the  postal  service  not  having  been  organized  on  a  practical 
basis.  There  were  very  few  concerns  doing  a  national  busi- 
ness. Each  state  was  a  political  parcel  to  itself,  and  eco- 
nomically so  to  a  great  degree.  We  can  imagine  the  extent 
of  intercommunication  when  a  decade  after  the  Constitution 
was  adopted  and  the  permanent  government  established,  in 
the  year  1801,  the  gross  receipts  from  the  post-office  were 
only  $32,000.  "Nearly  all  the  clothing  was  made  in  the 


HISTORY  OF  BUSINESS  DEPRESSIONS  99 

family,  as  was  the  cloth  from  which  it  was  cut.  The  leather 
was  tanned  and  the  grist  ground  at  a  near-by  tannery  and 
mill,  but  the  boots  and  shoes  were  made  by  father  during  the 
long  evenings  of  autumn."  This  was  the  business  situation 
in  those  days  outside  of  the  cities  which  had  a  shipbuilding 
and  carying  trade.  The  general  poverty,  therefore,  was  felt 
and  described  as  a  general  scarcity  of  money. 

A  writer  of  the  day  said :  "Many  are  willing  to  buy  and 
pay  fair  prices,  but  they  have  no  money ;  they  cannot  borrow 
it,  although  they  have  large  stocks  of  goods  to  hypothecate." 

While  there  was  plenty  of  specie  immediately  after  the 
war,  prices  were  abnormally  high,  which  of  itself  indicated 
a  scant  supply  and  accompanying  poverty.  Outside  of  land 
wealth  the  colonists  had  been  largely  drained,  and  toward 
the  end  of  the  war,  and  perhaps  two  years  after,  we  had 
more  specie  wealth  than  anything  else.  John  Marshall,  de- 
scribing the  situation  at  that  time,  said: 

"The  discontent  and  uneasiness,  arising  in  a  great  meas- 
ure from  embarrassments  in  which  a  considerable  number 
of  individuals  were  involved,  continued  to  become  more 
extensive.  At  length  two  great  parties  were  formed  in 
every  state  which  were  distinctly  marked,  and  which  pur- 
sued distinct  objects  with  systematic  arrangement.  The 
one  struggled  with  unabated  zeal  for  the  exact  observance  of 
public  and  private  engagements.  The  other  party  marked 
out  for  itself  a  more  indulgent  course;  viewing  with  ex- 
treme tenderness  the  case  of  the  debtor,  their  efforts  were 
unceasingly  directed  for  his  relief.  They  were  uniformly 
in  favor  of  retarding  the  administration  of  justice;  of  af- 
fording facilities  for  the  payment  of  debts;  or  of  suspend- 
ing their  collection  and  remitting  of  taxes." 

Mass  meetings  were  held,  radical  speeches  were  made, 
and  complaint  was  general.  There  was  particularly  an 
under-current  of  agitation  against  the  extortion  of  lawyers, 
who  profited  from  suits  against  debtors,  pauperizing  many 
for  their  own  gain.  It  was  charged  that  salaries  of  public 
officials  in  Boston  and  the  State  of  Massachusetts  were 
unreasonably  high,  and  that  taxes  due  in  1786  in  that  state 
were  estimated  to  amount  to  nearly  a  third  of  the  income 
of  the  people. 


100  HISTORY  OF  BUSINESS   DEPRESSIONS 

All  this  had  its  culmination  in  the  outbreak  of  Shay's  Re- 
bellion, which  involved  a  total  estimated  at  12,000  to  15,000 
men  recruited  from  Massachusetts,  largely,  and  augmented 
by  men  from  Rhode  Island,  Connecticut  and  New  Hamp- 
shire. This  nondescript  army  was  composed  of  the  ignorant 
in  their  respective  communities,  who  imagined  their  condi- 
tion might  be  bettered  by  fighting,  although  they  knew  not 
how.  It  could  not  be  said  that  taxes  fell  heavily  upon  these 
men  because  they  were  generally  not  property  owners,  but 
men  who  felt  the  pinch  of  poverty  and  entertained  the  idea 
that  their  new  liberties  meant  license.  The  Massachusetts 
Gazette  in  1787  published  the  following  letter  from  New 
York  City:  "This  morning  the  Governor,  the  Attorney 
General,  Adjutant,  etc.,  set  out  for  Albany  to  take  meas- 
ures to  quell  any  insurrection  that  may  happen  in  that  quar- 
ter. The  Legislature  of  this  State  are  decided  in  prevent- 
ing any  adherents  from  joining  the  Shays,  but  there  are  a 
great  proportion  of  people  who  are  ripe  for  confusion  and 
war.  This  is  because  they  are  so  embarrassed  in  their  af- 
fairs that  they  believe  no  disturbances  can  make  them 
worse." 

No  doubt  they  complained  most  against  the  extravagance 
of  officials.  The  rebellion  was  soon  put  down,  however,  and 
before  long  had  passed  into  history.  The  depression  grad- 
ually cleared  away.  The  nation  grew  and  prospered  to  such 
an  extent  that  the  children  of  those  who  took  part  in  Shay's 
Rebellion  became  some  of  the  wealthiest  families  in  New 
England. 

Under  conditions  existing  at  that  time  there  could  be  noth- 
ing else  but  depression.  There  was  no  legal  money  and  no 
central  government.  Trade  of  every  kind  was  awaiting  the 
adoption  of  the  Federal  Constitution,  which  went  into  op- 
eration in  1789.  The  Constitution  gave  the  Federal  Gov- 
ernment the  exclusive  right  to  coin  money,  and  as  soon  as 
the  Government  began  to  function  the  First  Bank  of  United 
States  was  chartered  in  1791,  under  a  charter  granted  by 
Congress.  Business  then  began  to  take  on  a  better  aspect. 


CHAPTER  VIII. 
THE  DEPRESSION  OF  1808-09. 

The  new  republic  of  the  United  States  of  America  had 
become  well  established  when  the  depression  of  1808-09  came 
on.  Washington  and  Adams  had  both  served  as  President 
and  retired,  and  Jefferson  was  at  the  head  of  the  govern- 
ment. This  depression  followed  a  period  of  great  prosper- 
ity. In  1793  war  broke  out  between  France  and  England 
and  involved  all  the  nations  of  Europe.  For  over  twenty 
years  the  best  energies  were  devoted  to  destruction  and  war- 
fare. This  was  America's  day.  While  England  was  sweep- 
ing French  merchantmen  off  the  seas  American  shipbuild- 
ing showed  an  enormous  expansion.  France,  who  was  hard 
pressed,  bitterly  resented  the  fact  that  America  would  not 
enter  the  war  as  her  ally,  claiming  that  we  had  agreed  to 
make  common  cause  against  Great  Britain  in  return  for  the 
help  she  had  rendered  us  twenty  years  previous.  Against 
the  generally  accepted  view,  this  nation  did  at  one  time  enter 
into  a  foreign  alliance.  This  was  with  France,  made  in  1778, 
but  in  the  year  1798  Congress  abrogated  this  treaty  and 
never  since  then  have  we  entered  into  any  alliance  whatso- 
ever with  any  foreign  power.  It  was  in  this  period  that 
America  practically  was  master  of  the  seas  so  far  as  mer- 
chant carying  trade  was  concerned.  There  was  a  large  and 
steady  demand  for  our  agricultural  products  among  the 
belligerent  countries.  Our  foreign  trade  increased  fourfold 
in  a  decade.  It  was  a  situation  very  similar  to  that  which 
existed  during  the  recent  World  War.  America  captured 
the  trade  in  the  western  hemisphere  of  most  of  the  countries 
at  war,  and  by  the  time  the  struggle  was  over  American 
shipping  tonnage  exceeded  that  of  any  other  nation  except 
England.  The  temporary  check  in  1802  during  a  short 
peace  in  Europe  gave  our  commerce  a  slight  setback,  but 


102  HISTORY  OF  BUSINESS  DEPRESSIONS 

at  the  outbreak  of  hostilities,  in  1803,  commerce  expanded 
until  in  1807  it  amounted  to  $138,500,000  in  imports  and 
$108,300,000  in  exports.  Pitkin  says,  "the  increase  in 
American  tonnage  during  this  period  has  no  comparison  in 
commercial  annals  of  the  world." 

The  depression  that  followed  set  in  in  1808  and  lasted 
through  1809,  starting  as  the  result  of  various  Orders  in 
Council  and  Napoleon's  decrees  which  were  directed  against 
the  neutral  trade,  largely  American.  Our  shipping  felt  the 
full  force  of  the  British  blockade  and  the  retaliatory  meas- 
ures taken  by  the  French.  About  sixteen  hundred  American 
vessels  and  $60,000,000  worth  of  property  were  captured 
by  France,  England  and  other  privateers.  Jefferson  recom- 
mended to  Congress  that  an  embargo  be  placed  on  Ameri- 
can shipping  or,  as  he  expressed  it,  "immediate  inhibition 
of  departure  of  our  shipping  to  ports  outside  of  the  United 
States."  This  had  a  far-reaching  effect  on  the  business  of 
the  country.  The  announcement  of  the  embargo  came 
almost  without  notice  and  caused  a  violent  shock  to  busi- 
ness, which  was  paralyzed  for  a  period.  In  a  single  year 
our  exports  fell  from  $108,300,000  to  $22,400,000,  far 
greater  proportionately  and  much  more  abruptly  than  any 
cessation  of  business  known  in  our  history.  Quoting  from 
an  article  written  shortly  after  this  period,  "in  the  large 
shipping  towns  business  of  every  kind  fell  off  and  soon 
utterly  ceased.  Rope  walks  were  deserted,  sail  makers 
were  idle,  shipwrights  and  draymen  had  scarcely  anything 
to  do.  Pitch  and  tar,  hemp  and  flour,  bacon,  salt  fish,  flax 
seed  became  drugs  upon  the  shippers'  hands,  but  the  great- 
est sufferers  of  all  were  the  sailors."  It  was  estimated  at  the 
time  that  30,000  seamen,  an  enormous  army  of  people  at 
that  time,  were  thrown  out  of  employment,  and  that  in  all 
100,000  men  were  out  of  work  for  a  year.  The  $50,000,000 
of  capital  invested  in  American  shipping  brought  in  no 
revenue. 

In  the  year  1809  customs  fell  from  $16,300,000  to  $7,200,- 
000  and  the  Secretary  of  the  Treasury,  Mr.  Gallatin,  was 


HISTORY  OF  BUSINESS  DEPRESSIONS  103 

forced  for  the  first  time  to  confront  a  deficit  of  $1,300,000. 

Prices  of  foreign  commodities  doubled,  while  prices  of 
domestic  goods  fell  below  cost  of  production.  Lumbermen 
and  fishermen  were  reduced  to  beggary,  and  farmers  un- 
able to  dispose  of  their  produce  offered  their  lands  for 
sale.  In  New  York  the  depression  caused  one  hundred  and 
twenty  bankruptcies  and  threw  twelve  hundred  debtors 
into  prison.  Farmers,  who  had  been  buying  land  on  credit, 
and  who  had  planted  great  crops  in  expectation  of  foreign 
demand,  soon  began  to  feel  the  effects,  and  many  of  them, 
together  with  merchants  depending  upon  them,  were  forced 
into  failure  and  bankruptcy.  This  depression  was  brought 
on  entirely  because  of  stoppage  of  trade  with  the  outside 
world.  Local  conditions  entered  very  little  into  it. 

When  our  ships  were  idle  British  merchants  were  cap- 
turing the  West  Indian  and  South  American  trade.  Gibbins 
in  his  "Economic  and  Industrial  Progress  of  the  Century" 
tells  that  more  Manchester  goods  were  shipped  to  South 
America  in  a  few  weeks  than  in  twenty  years  preceding, 
and  the  quantity  of  English  exports  that  poured  into  the 
city  of  Rio  de  Janeiro  was  so  great  that  warehouses  could 
not  be  provided  sufficient  to  contain  them.  While  the  Con- 
tinental edicts  which  brought  on  the  embargo  were  the 
primary  cause  of  the  depression  and  caused  great  resent- 
ment in  this  country  against  Great  Britain  who  enforced 
them — eventually  leading  to  war  with  that  country — yet  it 
is  generally  overlooked  that  France  originated  the  block- 
ading policy. 

In  those  days  debt  was  a  crime  and  the  jails  were  full  of 
debtors.  New  York  was  described  as  a  graveyard,  so  dead 
was  its  commerce,  and  while  New  York  and  New  England 
were  the  greatest  sufferers,  the  South  and  West  felt  the 
effects  disastrously.  The  depression  ended  when  Jefferson 
yielded  to  pressure  and  the  embargo  was  repealed  in  1809, 
after  which  American  commerce  quickly  responded  and  our 
tonnage  engaged  in  foreign  trade  the  following  year  reached 
981,000  tons.  Those  were  the  days  known  as  our  heyday  of 


104  HISTORY  OF  BUSINESS  DEPRESSIONS 

shipbuilding.  We  built  fine  wooden  ships,  an  art  that  later 
passed  out  of  existence  and  was  not  resurrected  until  the 
late  war,  when  several  hundred  wooden  ships  were  built. 

The  period  of  this  depression  makes  what  might  be  termed 
the  turn  from  industrial  dependence  of  the  United  States 
and  the  starting  of  manufacturing  and  commercialism 
largely  as  it  exists  today.  It  was  at  this  time  that  we  first 
began  to  realize  that  we  were  really  a  nation.  What  busi- 
ness we  had,  previously  had  been  carried  on  much  the  same 
as  during  colonial  days.  The  shipping  depression  turned 
the  attention  of  both  capital  and  labor  to  the  development 
of  our  own  country.  Henceforth,  we  looked  less  and  less 
across  the  waters  to  the  eastward  for  our  material  pros- 
perity, but  rather  we  faced  to  the  west,  where  a  great  em- 
pire lay  ready  for  development  after  Jefferson  had  pur- 
chased Louisiana.  In  many  respects  the  depression  was  a 
blessing  in  disguise.  We  now  started  to  develop  our  own 
resources  and  get  rich  by  trading  among  ourselves.  We  are 
the  only  nation  in  the  history  of  the  world  that  has  ever 
been  able  to  do  this.  Countries  like  China  and  Russia  which, 
in  previous  centuries,  largely  traded  among  themselves  be- 
came impoverished. 

Mr.  Gallatin,  Secretary  of  the  Treasury,  in  1809,  esti- 
mated the  annual  product  of  American  manufacture  at 
$120,000,000  and  strongly  approved  of  the  policy  of  over- 
coming the  existing  depression  by  developing  our  own  re- 
sources and  our  own  markets. 

Unsound  banking  existed  in  New  England  up  to  this 
period  the  same  as  in  other  sections  of  the  country,  but 
following  the  crisis  the  Massachusetts  Legislature  adopted 
stringent  measures  to  correct  the  system  and  thenceforth 
New  England  banks  have  been  the  healthiest  and  soundest 
in  the  country  in  every  period  of  trouble.  They  even  passed 
through  the  crisis  of  1814  without  suspension.  After  a 
breathing  spell  industries  again  started  up,  and  1809  saw 
sixty-two  new  cotton  mills  with  31,000  spindles  erected  in 
New  England  and  building  steadily  continued  until  the  end 
of  the  European  War. 


CHAPTER  IX 
DEPRESSION  OF  1814 

The  year  1814  records  a  financial  flurry  which  might  be 
termed  a  short  panic.  However,  it  was  of  brief  duration  be- 
cause the  war  with  England  was  on  and  the  entire  resources 
of  the  nation  were  of  necessity  thrown  behind  the  situation. 
The  shock  was  caused  by  the  capture  of  Washington  by  the 
British  on  August  24th,  1814.  So  severely  was  it  felt  in 
financial  circles  that  practically  all  the  banks  except  those 
in  New  England  were  forced  to  suspend  specie  payments 
and  the  country  was  again  put  on  a  paper  money  basis. 
All  the  old  evils  of  the  Continental  period  began  to  appear — 
over-issue,  depreciation  and  inequality  of  value.  The 
notes  of  the  New  York  banks  were  10  per  cent  below  par, 
those  of  Washington  and  Baltimore  22  per  cent,  while  in 
the  West  some  of  them  fell  to  as  low  as  50  per  cent.  The 
people  were  compelled  to  use  this  depreciated  and  fluctua- 
ting currency  because  there  was  no  other  to  take  its  place. 
It  was  this  crisis  that  led  to  re-establishment  of  the  Second 
Bank  of  the  United  States,  the  First  Bank  of  the  United 
States  having  been  dissolved  in  1811,  at  which  time  $7,- 
000,000  in  specie — an  enormous  sum  for  those  times — was 
returned  to  Europe,  this  amount  having  been  held  by  Eu- 
ropeans in  the  stock  of  the  First  Bank. 

The  military  events  of  the  war  were  mostly  disastrous 
and  humiliating  to  the  United  States.  The  outcome  can  be 
said  to  have  been  no  better  than  a  draw.  It  was  at  this 
time  that  the  importance  of  American  manufactures  was 
forced  upon  the  attention  of  the  nation.  Munitions  of  war, 
clothing,  and  articles  of  living  had  to  be  provided.  Specula- 
tion and  extortion  were  practiced  to  a  large  extent,  high 
prices  as  usual  bringing  temporary  prosperity,  checked 
only  by  the  uncertainty  caused  by  the  events  of  1814. 


106  HISTORY  OF  BUSINESS   DEPRESSIONS 

New  England  had  at  this  time  "cornered"  the  available 
supply  of  specie.  In  1814  there  were  $7,000,000  in  specie 
lying  in  the  Boston  banks,  while  the  states  south  and  west 
of  New  England  were  practically  stripped  of  metallic  money. 
To  make  up  for  the  deficiency  in  a  circulating  medium,  the 
banks  resorted  to  the  expedient  of  issuing  large  sums  of 
paper  money.  During  1814  the  unfavorable  turn  in  the  for- 
tunes of  war  and  a  sharp  attack  on  all  paper  issues  by  the 
disgruntled  Boston  banking  interests  caused  a  great  depre- 
ciation in  this  credit  currency  and  the  nation  suffered  from 
the  ensuing  panic. 

The  New  England  banks  were  the  only  institutions  in 
the  country  that  did  not  suspend  specie  payment.  When 
three  wagon  loads  of  specie  had  been  collected  in  New  York 
and  had  started  on  their  way  to  New  England  to  balance 
accounts,  the  shipment  was  seized  by  the  collector  of  the 
port  at  New  York  on  the  pretext  that  it  was  the  intention 
of  the  New  England  banks  to  send  the  money  to  Canada. 

As  an  instance  of  how  bad  the  money  situation  was,  the 
Government  failed  to  redeem  Treasury  notes  and  actually 
paid  some  of  the  soldiers  in  bank  notes  which  were  not  re- 
ceivable for  taxes.  The  War  Department  could  not  pay  a 
bill  for  $3,500,  and  the  Secretary  of  the  Treasury  went  beg- 
ging for  smaller  sums.  Yet  business  flourished.  Manu- 
facturers increased  their  output  to  supply  the  needs  of  the 
war  and  the  people  patriotically  took  state  bank  notes,  many 
of  which  were  caught  in  the  jams  of  later  panics  and  were 
never  redeemed. 

The  following  table  of  our  imports  and  exports  will  show 
the  effects  of  the  year  1814  on  industry : 

Domestic  Total 

Year  Exports  Imports 

1811  $45,294,000        $  63,400,000 

1812  30,032,000         77,030,000 

1813  25,008,000         22,005,000 

1814  6,782,000         12,965,000 

1815  45,974,000         113,041,000 

1816  64,782,000        147,103,000 

1817  68,313,000         99,260,000 


HISTORY  OF  BUSINESS  DEPRESSIONS  107 

The  demand  for  goods  and  the  general  inflation  brought 
on  by  the  war  and  stoppage  of  imports  increased  the  num- 
ber of  banks  from  eighty-eight  to  two  hundred  and  eight. 
During  the  panic  of  this  year  ninety  banks  suspended. 

The  close  of  the  war  brought  a  period  of  fairly  good 
times  with  its  consequent  evils  of  speculation  and  reckless 
banking.  The  fact  that  good  times  followed  peace  in  1816 
is  another  instance  that  belies  the  claim  that  depression  in- 
variably follows  war. 


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HISTORY  OF  BUSINESS  DEPRESSIONS 

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CHAPTER  X. 
THE  DEPRESSION  OF  1818-19 

In  the  first  few  years  following  the  signing  of  peace 
which  ended  the  War  of  1812,  business  experienced  a  re- 
markable revival.  Credit  money  issues  to  prosecute  the  war 
made  currency  free  and  easy.  The  total  volume  of  exports 
and  imports  in  1816  amounted  to  ten  times  that  in  1814,  but 
this  prosperity  was  short  lived,  and  1919  saw  a  lament- 
able decline. 

The  poor  and  inadequate  banking  system  in  vogue  at  the 
time  was  a  major  cause  of  the  depression.  In  addition  may 
be  mentioned  the  speculation  in  western  lands,  the  over- 
rapid  commercial  expansion  and  the  unstable  position  of 
the  manufacturing  industries  which  had  grown  abnormally 
during  the  embargo,  and  after  the  war  were  left  exposed  to 
foreign  competition.  At  the  same  time  the  State  banks 
contracted  their  note  circulation  of  $100,000,000  in  1817  to 
$45,000,000  in  1819  and  thus  reduced  the  credit  facilities  at 
the  very  time  they  were  most  in  demand.  Specie  payments 
were  again  generally  suspended,  prices  fell  disastrously, 
and  failures  occurred  in  every  part  of  the  country. 

This  depression  set  in  during  the  year  1818.  The  worst 
conditions  existed,  however,  in  1819,  and  this  is  commonly 
known  as  the  crisis  of  1819.  It  continued  during  the  whole 
of  1820.  Our  three  years  of  prosperity  following  the  war 
made  us  eager  buyers  with  our  inflated  money.  Further- 
more, it  had  taken  Great  Britain  that  long  to  realize  that 
America  was  becoming  independent  of  her  manufactures, 
and  when  realization  came  British  manufacturers,  eager  to 
regain  control  of  their  lost  markets  in  this  country,  began 
sending  in  ship  loads  of  merchandise  which  they  offered  on 
most  liberal  terms.  These  goods  began  arriving  during  the 
height  of  our  prosperity,  and  as  money  was  readily  avail- 


110  HISTORY   OF  BUSINESS   DEPRESSIONS 

able  they  were  snatched  up  at  low  prices.  But  the  people 
finally  paid  the  bill  with  compound  interest  when  our  own 
industry  began  to  feel  the  pinch.  American  woolen  mills 
closed  down,  many  of  them  being  ruined. 

In  spite  of  the  suspension  of  specie  payment  in  1814  the 
country  had  prospered  because  of  the  large  amount  of 
paper  money  put  into  circulation  during  the  war,  which  was 
readily  accepted  after  its  close.  During  the  prosperity 
preceding  this  depression  the  prices  of  commodities  rose 
higher  than  ever  before  or  since  in  American  history.* 

Europe,  as  well  as  America,  suffered  commercial  reverses 
in  this  year.  Our  finances  were  probably  somewhat 
strained  as  a  reflection  of  the  severe  crisis  that  was  sweep- 
ing over  Europe  following  the  Napoleonic  wars. 

The  causes  of  the  panic  only  indirectly  resulted  from 
the  war.  A  period  of  three  years  of  great  prosperity  fol- 
lowed the  War  of  1812,  which  ended  in  1815.  With  the 
coming  of  peace  came  renewed  activity  in  shipping.  In 
1816  our  imports  reached  the  high  mark  of  $147,000,000. 
Surplus  stocks  of  European  goods  fairly  flooded  the  country. 
American  merchants  liked  the  situation  because  the  con- 
sumers were  buying,  but  the  manufacturers  gradually  be- 
gan to  feel  the  strain  of  competition  and  again  set  up  a 
cry  for  stronger  protection.  Short  crops  abroad,  together 
with  other  favorable  conditions,  created  such  a  market  for 
our  own  agricultural  products  that  we  could  for  a  time 
readily  absorb  the  large  imports,  but  as  soon  as  the  demand 
for  our  staples  was  supplied  disorder  resulted.  The  pre- 
vailing prosperity  and  accompanying  high  prices  blinded 
the  people  to  the  dangers  ahead.  Currency  had  again  be- 
come inflated. 

In  1818  the  report  became  widespread  that  the  banks 
were  in  a  critical  condition.  An  attempt  had  been  made  to 
resume  specie  payment,  but  this  had  failed,  being  successful 
only  in  spots  or  for  a  limited  time.  In  preparation  for  this 
the  banks  had  restricted  their  loans,  limiting  credits  to  busi- 

*See  Chart  Page  108. 


HISTORY  OF  BUSINESS   DEPRESSIONS  111 

ness  and  agriculture.  The  following  year  business  felt  the 
full  effects  of  depression.  In  1819  steps  were  taken  to 
compel  banks  to  pay  specie  or  forfeit  their  charters.  Many 
banks  seeing  this  was  impossible  suspended,  bringing  the 
first  widespread  panic  in  our  history. 

The  first  national  bank  which  Hamilton  had  organized 
had  failed  of  re-charter  ten  years  previous,  and  to  take  its 
place  hundreds  of  so-called  joint  stock  companies  secured 
charters  and  proceeded  to  issue  bank  notes  with  no  adequate 
provision  for  redemption.  The  banks  of  Massachusetts 
and  New  York,  which  sections  had  learned  their  lessons  in 
the  evils  of  over-inflation,  were  restricted  as  to  the  issues 
and  assets,  but  in  the  South  and  West,  where  an  abundance 
of  money  was  needed  to  develop  their  resources,  the  people 
hankered  for  cheap  money  and  plenty  of  it,  and  the  state 
authorities  and  bankers  sympathized  with  the  movement. 
Our  circulating  medium  had  increased  to  $100,000,000, 
when  it  became  so  apparent  that  trouble  was  ahead  that 
business  men  began  to  petition  for  a  national  bank  of  issue 
in  order  to  provide  a  sounder  currency. 

The  Second  National  Bank  was  accordingly  chartered 
with  $35,000,000  capital.  The  notes  issued  by  this  bank 
proved  a  welcome  addition  to  the  currency  and  were  taken 
in  many  parts  of  the  country  where  local  issues  were  thor- 
oughly discredited.  But  the  national  bank  had  assumed  too 
much  of  a  load  in  undertaking  to  force  the  state  banks  to  a 
specie  basis,  particularly  in  view  of  the  mismanagement  in 
its  own  affairs,  as  charged  by  some  historians.  Of  the 
$7,000,000  specie  required  in  the  charter,  but  $2,000,000 
was  actually  contributed,  and  of  the  $21,000,000  bond  sub- 
scriptions but  $9,000,000  was  made  good  in  government 
bonds,  the  personal  notes  of  subscribers  being  accepted  in 
lieu  of  the  stipulated  payment. 

Unwarranted  accommodations  and  speculation  brought 
the  institution  to  the  verge  of  bankruptcy  in  1818,  when  the 
Baltimore  branch  failed  for  $3,000,000.  An  investigation  of 
its  affairs  was  ordered  by  Congress  and  a  vigorous  reform 


112  HISTORY  OF  BUSINESS  DEPRESSIONS 

prescribed.  The  original  management  was  obliged  to  re- 
sign. Langdon  Cheves,  of  Charleston,  was  elected  president, 
and  under  his  conservative  administration;  the  national 
bank  retrieved  its  financial  standing.  But  a  reform  ad- 
ministration could  not  avert  the  business  crisis  which  years 
of  speculation  and  wild-cat  banking  had  engendered.  The 
sudden  contraction  of  credit,  following  upon  a  period  of 
reckless  financing,  jeopardized  banks  and  business  enter- 
prises everywhere  outside  of  New  England.  These  curtail- 
ments were  ordered  in  March,  1819.  The  bank  at  that 
time  was  in  a  truly  deplorable  condition.  Vast  sums  of 
specie  had  been  imported  at  large  expense  to  maintain 
specie  payments,  but  nearly  all  was  gone.  On  the  21st  of 
April  there  was  only  $126,745.28  and  the  bank  owed  to  the 
city  banks  of  Philadelphia  $79,125.99.  In  April,  1819,  the 
circulation  of  the  Second  Bank  of  the  United  States  was  less 
than  half  that  of  the  year  previous,  April,  1818.  The  fail- 
ures of  the  State  banks  began  in  1818,  the  year  after  the 
Second  United  States  Bank  came  into  existence.  In  the 
year  preceding,  June  26, 1819,  according  to  later  authorities, 
$800,000  in  specie  was  drawn  from  banks  in  Ohio — an 
enormous  amount  for  those  times.  The  financial  stringency 
was  such  that  everyone  was  in  debt  and  payment  was  almost 
impossible. 

In  1819  state  banks,  following  the  national  bank,  con- 
tracted their  circulation  as  shown  by  the  following  figures : 

On  November  1,  1816  to $4,756,000 

On  November  1,  1817  to 3,782,000 

On  November  1,  1818  to 3,011,000 

On  November  1,  1819  to 1,318,000 

It  was  during  this  period  that  savings  banks  got  their 
first  impetus.  During  periods  of  business  adversity  people 
were  thrown  out  of  employment,  and  improvidence  during 
prosperity  brought  consequent  suffering  and  even  pauper- 
ism in  times  of  depression.  Agitation  started  among  the 
working  people  and  the  poorer  classes  to  provide  savings 
against  these  gloomy  days.  Thus  was  the  great  savings 
bank  system  of  today  founded. 


HISTORY  OF  BUSINESS  DEPRESSIONS  113 

Not  only  the  banks,  but  business  men  of  all  classes  had 
been  mortgaging  the  future  beyond  warrant.  Manufac- 
turers, encouraged  by  the  prospect  of  adequate  protection, 
enlarged  their  plants  and  doubled  their  output.  Land  com- 
panies invested  borrowed  money  in  property  that  could  not 
be  sold  at  a  profit,  and  farmers  mortgaged  their  lands  for 
the  funds  with  which  to  make  improvements.  Large  sums 
were  sunk  in  canals  and  post  roads  that  could  not  pay  divi- 
dends on  the  investment,  much  less  make  good  the  obliga- 
tions incurred.  Confidence  in  the  resources  of  the  country 
and  its  ultimate  prosperity  led  men  to  anticipate  industrial 
development  by  a  generation  and  to  risk  too  much  upon  the 
immediate  future. 

The  contraction  of  the  currency  and  the  refusal  of  the 
National  Bank  to  discount  any  but  well-secured  paper,  called 
a  sudden  halt  in  this  mad  career  of  speculation.  Hundreds 
of  business  enterprises  were  prostrated  and  thousands  of 
apparently  prosperous  men  were  ruined.  The  closing  of 
factories  threw  workmen  out  of  employment,  and  the  streets 
of  Philadelphia,  Baltimore,  New  York,  Pittsburg,  and  many 
lesser  manufacturing  and  commercial  centers,  were  thronged 
with  destitute  men  and  women  seeking  work.  Prices  fell, 
and  the  value  of  real  estate  shrank  to  one-third  the  level  of 
the  speculative  period. 

During  this  time  speculation  was  so  wild  that  no  one 
failed  on  account  of  a  smaller  sum  than  $100,000.  A  draw- 
ing-room that  had  cost  $40,000,  and  a  bankrupt's  wine- 
cellar  estimated  to  have  cost  $7,000,  were  cited  as  instances 
of  the  general  prodigality. 

Congress  appreciating  the  condition,  immediately  set 
about  to  ascertain  the  effects  of  the  panic,  and  a  Senatorial 
Committee  of  Inquiry,  appointed  for  the  purpose,  declared 
that  the  panic  imposed  ruinous  losses  upon  landed  property, 
which  had  fallen  from  a  quarter  to  even  a  half  of  its  value. 
In  consequence  forced  sales,  bankruptcies,  scarcity  of  money, 
and  a  stoppage  of  work  occurred.  House  rents  fell  from 
$1,200  to  $450.  On  the  13th  of  December,  1819,  a  com- 


114  HISTORY   OF  BUSINESS   DEPRESSIONS 

mittee  of  the  House  of  Representatives  reported  that  "the 
panic  extended  from  the  greatest  to  the  smallest  capitalists." 

Lands  and  agricultural  products  fell  to  one-half  the 
prices  which  were  readily  obtainable  ten  years  previous.  In 
the  Mississippi  Valley  the  speculative  demand  for  money 
had  been  even  greater  than  in  the  East.  Virgin  soil  and 
limitless  possibilities  in  the  way  of  development  created  a 
reckless  system  of  financing  that  brooked  no  restraint.  Sil- 
ver sufficient  to  serve  as  the  medium  of  exchange  came  into 
the  country  through  the  New  Orleans  trade  with  the  West 
Indies  and  Mexico,  but  the  demand  for  capital  with  which 
to  develop  the  country  could  only  be  met  by  credit  agencies. 
In  1817-18  forty  banks  of  issue  had  been  chartered  in  Ken- 
tucky, and  Tennessee  and  Ohio  hastened  to  adopt  the 
same  alluring  expedient.  The  banks  issued  money  with- 
out stint  and  loaned  to  speculators  on  easy  terms.  Prices 
rose,  and  though  the  silver  went  over  the  mountains  to  New 
York  and  Philadelphia,  the  Mississippi  Valley  seemed  in 
the  heyday  of  prosperity.  Then  when  the  National  Bank 
presented  an  accumulation  of  notes  for  redemption,  the 
state  banks,  unable  to  meet  their  obligations,  were  forced 
to  suspend  specie  payment,  and  the  boom  collapsed.  To 
mitigate  the  general  distress  the  state  legislatures  passed 
relief  laws,  staying  proceedings  against  debtors. 

Knox's  "History  of  Banking"  quotes  a  Connecticut  paper 
of  that  period,  which  comments  on  the  distress  as  follows : 

"Why  is  the  community  so  much  embarrassed? 
Because  banks  lend  money  that  they  have  not  go  to  lend. 
And  because  people  spend  money  they  have  not  got  to 
spend. 

REMEDY 

Own  the  money  before  you  lend  it! 
Earn  the  money  before  you  spend  it!" 

Nile's  Register,  which  is  unquestionably  the  best  authority 
for  details  on  our  early  economic  history,  prints  a  letter 
from  a  United  States  Bank  director  to  a  friend  in  England 
vividly  portraying  conditions  of  the  period : 

"Our  difficulties  in  commerce  continue  without  abate- 


HISTORY  OF  BUSINESS  DEPRESSIONS  115 

merit.  Men  in  business  are  like  patients  in  the  last  stage  of 
consumption,  hoping  for  a  favorable  change  but  growing 
worse  every  day.  You  have  some  regular  and  profitable 
trade  (in  England),  we  have  none.  It  is  all  scamper  and 
haphazard.  A  long  continuance  of  distresses  in  the  commer- 
cial world  has  had  a  bad  effect  on  the  morality  of  the  coun- 
try. The  vast  number  of  failures  takes  away  the  odium. 
Men  fail  in  parties  for  convenience,  and  the  barriers  of 
honesty  are  broken  down  by  a  perpetual  legislation  suited 
to  the  convenience  of  insolvent  debtors  .  .  .  The 
farmer  is  become  as  poor  as  a  rat;  the  labor  on  the  farm 
costs  him  more  than  the  produce  is  worth.  He  cannot  pay 
the  storekeeper  and  the  storekeeper  cannot  pay  the  mer- 
chant." 

Various  State  legislatures  undertook  to  pass  laws  <to 
strengthen  the  banking  system,  particularly  in  New  York 
and  Ohio,  where  stringent  banking  laws  were  enacted.  In 
those  days  communication  was  slow,  there  being  no  rail- 
roads or  telegraphs  and  the  panic  spread  gradually  from 
East  to  West.  It  did  not  reach  Tennessee  until  1820,  at 
which  time  the  State  authorized  the  Bank  of  Tennessee  to 
issue  bills  to  relieve  the  distress.  Some  states  at  this  time 
passed  replevin  laws  which  gave  debtors  as  long  as  two 
years  within  which  to  reclaim  their  property  from  their 
creditors.  Kentucky  undertook  to  meet  the  situation  by 
establishing  the  Bank  of  the  Commonwealth,  authorized  to 
issue  notes  on  the  basis  of  the  State  revenues  and  to  lend 
the  same  to  needy  persons  on  land  security.  But  the  remedy 
was  worse  than  the  disease.  In  a  short  time  the  notes  of 
the  bank  were  worth  50  cents  on  the  dollar.  The  farmers 
lost  their  land  and  left  the  State  by  hundreds  and  thousands, 
and  business  men  were  put  to  every  expedient  to  provide 
money  for  cash  payments. 

A  Scotch  traveler  described  the  situation  as  follows :  "In 
this  western  country  there  is  a  great  diversity  of  paper 
money.  Small  bills  are  in  circulation  of  a  half,  a  fourth,  an 
eighth,  and  even  the  sixteenth  of  a  dollar.  There  small  rags 
are  not  current  at  a  great  distance  from  the  places  of  their 
nativity.  A  considerable  portion  of  the  little  specie  to  be 


116  HISTORY  OF  BUSINESS   DEPRESSIONS 

seen  is  of  what  is  called  cut  money — dollars  cut  into  two, 
four,  eight  or  sixteen  pieces.  This  practice  prevents  much 
money  from  being  received  in  banks,  or  sent  out  of  the 
country  in  the  character  of  coin,  and  would  be  highly  com- 
mendable were  it  not  for  the  frauds  committed  by  those 
who  clip  the  pieces  in  reserving  a  part  of  the  metal  for 
themselves  .  .  ." 

Again,  writing  of  Cincinnati:  "There  is  here  much 
trouble  with  paper  money.  The  notes  current  in  one  part 
are  either  refused  or  taken  at  a  large  discount  in  another. 
Banks  that  were  creditable  a  few  days  ago  have  refused  to 
redeem  their  paper  in  specie,  or  in  notes  of  the  United  States 
Bank  .  .  .  The  creation  of  this  vast  host  of  fabricators 
and  vendors  of  base  money  must  form  a  memorable  epoch 
in  the  history  of  the  country.  These  craftsmen  have  greatly 
increased  the  money  capital  of  the  nation  and  have,  in  a 
corresponding  degree,  enchanced  the  nominal  value  of 
property  and  labor.  By  lending  and  otherwise  emitting 
their  engravings,  they  have  contrived  to  mortgage  and  buy 
much  of  the  property  of  their  neighbors,  and  to  appropriate 
to  themselves  the  labor  of  less  moneyed  citizens.  Proceed- 
ing in  this  manner,  they  cannot  retain  specie  enough  to 
redeem  their  bills,  admitting  the  gratuitous  assumption 
that  they  were  once  possessed  of  it.  They  seem  to  have 
calculated  that  the  whole  of  their  paper  would  not  return 
on  them  in  one  day.  Small  quantities,  however,  of  it  have, 
on  various  occasions,  been  sufficient  to  cause  them  to  sus- 
pend specie  payments.  The  money  in  circulation  is  puz- 
zling to  traders,  and  more  particularly  to  strangers,  for  be- 
sides the  multiplicity  of  banks,  and  the  diversity  of  supposed 
value,  fluctuations  are  so  frequent,  and  so  great,  that  no  man 
who  holds  it  in  his  possession  can  be  safe  for  a  day.  The 
merchant,  when  asked  the  price  of  an  article,  instead  of 
making  a  direct  answer,  usually  puts  the  question,  'What 
sort  of  money  have  you  got?'  Supposing  that  a  number  of 
bills  are  shown,  and  one  or  more  are  accepted  of,  it  is  not 
till  then  that  the  price  of  the  goods  is  declared,  and  an  addi- 
tional price  is  uniformly  laid  on  to  compensate  for  the  sup- 
posed defect  in  the  quality  of  the  money."* 

The  Legislature  of  the  State  of  Pennsylvania  appointed 


*As  told  in  "Flinf's  Letters  from  America." 


HISTORY  OF  BUSINESS  DEPRESSIONS  117 

a  committee  to  inquire  into  the  causes  and  extent  of  the 
distress.     It  brought  in  a  report  in  substance  as  follows: 

fl.  Ruinous  sacrifices  of  landed  property  at  sheriff's 
sales. 

2.  Forced     sales     of     merchandise,     household     goods, 
farming  stock  and  utensils,  at  prices  far  below  the  cost  of 
production. 

3.  Numerous    bankruptcies   and   pecuniary    embarrass- 
ments of  every  description. 

4.  A  general  scarcity  of  money  throughout  the  country, 
which  renders  it  almost  impossible  for  the  husbandman,  or 
other  owner  of  real  estate,  to  borrow  at  a  usurious  interest. 

5  and  7.  A  general  suspension  of  labor,  and  a  universal 
suspension  of  all  large  manufacturing  operations. 

6.  An  almost  entire  cessation  of  the  usual  circulation 
of  commodities,  and  a  consequent  stagnation  of  business,  as 
are  absolutely  required  by  the  season. 

8  and  9.  Usurious  extortions,  and  the  overflowing  of 
prisons  with  insolvent  debtors,  most  of  whom  are  confined 
for  trifling  sums. 

10  and  11.  Numerous  law  suits,  and  vexatious  losses 
arising  from  the  depreciation  and  fluctuation  in  the 
value  of  bank-notes,  the  impositions  of  brokers  and  the 
frauds  of  counterfeiters. 

12.  A  general  inability  in  the  community  to  meet  with 
punctuality  the  payment  of  debts,  even  for  family  ex- 
penses, which  is  experienced  as  well  by  those  who  are 
wealthy  in  property  as  by  those  who  have  hitherto  relied 
upon  their  current  receipts  to  discharge  their  current  en- 
gagements. 

During  the  four  years  between  1817  and  1821  the  holders 
of  property  in  the  United  States  were  supposed  to  have 
suffered  a  depreciation  of  nearly  eight  hundred  million 
dollars.  General  bankruptcy  spread  its  darkness  over  the 
land ;  many  of  the  wealthiest  families  were  reduced  to  pov- 
erty; laborers  suffered  for  want  of  bread;  improvements 
of  all  sorts  were  abandoned,  and  a  scene  of  the  most  in- 
tense national  distress  ensued. 

As  the  tide  of  internal  commerce  had  risen,  there  had 
been  a  general  expansion  of  business.  A  depression  had  to 
come  for  several  reasons :  first,  as  a  reflection  of  European 


fAs  told  in  Raguet's  "Currency  and  Banking." 


118  HISTORY  OF   BUSINESS   DEPRESSIONS 

troubles;  second,  a  stoppage  of  overproduction;  and  third, 
to  get  money  on  a  better  basis. 

Spanish  dollars  were  bringing  7  per  cent  premium  in 
New  York,  and  it  was  apparent  that  there  was  an  untold 
amount  of  bank  notes  issued  that  could  not  possibly  be  re- 
deemed. 

From  the  close  of  the  war  in  1815  to  1818  there  was  a  per- 
fect mania  for  chartering  state  banks  and  gambling  in 
their  stocks  was  a  marked  feature  of  the  day.  Says  Niles : 
"Wherever  there  is  a  church,  a  blacksmith's  shop  and  a 
tavern  seems  a  proper  site  for  one  of  them!" 

It  is  little  wonder  that  with  all  of  this  the  Bank  of  the 
United  States  was  forced  to  contract  its  loans  because  of 
mismanagement,  causing  the  president  to  flee  from  the 
wreck.  As  one  writer  put  it,  "The  bank  was  saved  and  the 
people  were  ruined." 

Business  suffered  immensely,  and  it  was  a  rare  case 
where  a  business  firm  was  not  embarrassed.  In  the  county 
of  Morris,  New  Jersey,  there  were  about  forty  manufactur- 
ing concerns  at  the  close  of  the  war.  Of  these,  all  save  four 
or  five  were  either  abandoned  or  sold  during  the  next  eight 
years.  The  few  textile  industries  that  had  survived  the 
competition  with  England  after  the  war  were  ruined,  the 
iron  industries  of  Pittsburg  and  Cincinnati,  some  of  which 
had  not  been  disturbed  by  the  importations  because  of  the 
protection  afforded  by  high  freight  rates  and  the  increased 
duties  of  1818,  were  compelled  to  close  down  on  account  of 
the  heavy  fall  in  prices  and  the  general  depression.  Prices 
of  all  kinds  fell,  cotton  goods  going  down  from  25  cents  to 
19  cents  a  yard. 

The  West  felt  the  distress  with  extreme  severity.  There 
was  no  specie  and  the  notes  of  the  newer  banks  in  that  sec- 
tion were  practically  worthless.  Farmers  and  business  peo- 
ple alike  had  mortgaged  their  lands  and  other  assets,  and  as 
they  could  not  pay  a  great  deal  of  it  fell  into  the  hands  of 
the  banks,  particularly  the  Bank  of  the  United  States.  At 
the  end  of  the  difficulties  it  was  found  that  "the  bank 


HISTORY  OF  BUSINESS  DEPRESSIONS  119 

owned  a  large  part  of  Cincinnati ;  hotels,  coffee  houses,  ware- 
houses, stores,  stables,  iron  foundries,  residences,  vacant 
lots,  besides  over  50,000  acres  of  good  farm  land  in  Ohio 
and  Kentucky."  In  those  days  redemption  of  bills  rested 
with  the  agents  of  the  individual  banks,  many  times  these 
agents  using  the  utmost  skill  and  resourcefulness  to  keep  the 
bills  from  being  presented  for  payment. 

Niles,  writing  of  that  day,  said  that  "he  had  more  than 
$100  in  small  notes  of  the  Bank  of  the  United  States  and 
could  not  pay  the  postage  of  a  few  letters." 

Throughout  the  country  failures  were  continuous  through 
1819  and  1820.  In  Georgia  the  State  Legislature  passed  an 
act  suspending  the  law  allowing  25  per  cent  damages  on  the 
failure  of  a  state  bank  to  redeem  its  notes  in  specie.  The 
month  of  August,  1819,  found  20,000  persons  seeking  em- 
ployment in  Philadelphia,  and  a  similar  condition  of  affairs 
in  the  other  great  cities  of  the  North. 

The  provision  market  of  the  western  farmers  was  great- 
ly injured,  and  manufacturer,  farmer,  planter,  and  mer- 
chant all  succumbed  before  the  general  catastrophe.  "Be- 
fore long  prices  fell  so  low  that  from  the  eastern  seaports 
to  Cincinnati,  Pittsburg,  and  Nashville  in  the  West,  men 
were  thrown  out  of  work  by  the  closing  of  factories.  Cotton, 
woolen,  silk,  flax,  iron,  lead,  tin,  brass,  and  copper  manufac- 
tures, glass  and  earthernware,  haberdashery,  hats,  and  other 
English  goods  were  sold  at  low  prices  in  auction  sales ;  cheap 
India  cottons  came  in  large  bulks ;  silks,  cotton  goods,  wine, 
and  brandy  came  from  southern  Europe  and  France ;  woolen, 
linen,  iron,  lead,  and  glass  manufactures,  spirits,  cheese, 
and  paints  from  northern  Europe ;  sugar,  rum,  and  molasses 
from  the  West  Indies." 

The  depression  lasted  until  1821,  very  little  headway  be- 
ing made  until  then. 

In  order  to  draw  a  clear  picture,  it  is  fitting  to  close  this 
chapter  with  a  recital  of  conditions  in  the  country  as  re- 
ported by  the  Committee  on  Ways  and  Means  in  Congress : 

"From  the  extraordinary  depression  of  commerce,  with- 


120  HISTORY   OF  BUSINESS   DEPRESSIONS 

in  the  last  three  years,  the  stagnation  of  our  navigation, 
the  depreciation  in  the  value  of  our  exports,  the  corres- 
ponding depreciation  in  the  value  of  property  of  every  de- 
scription, and  the  serious  embarrassments  under  which 
every  branch  of  industry  now  labors,  economy  and  re- 
trenchment in  the  expenditures  of  every  citizen  are  im- 
periously required." 

And  a  little  later  a  report  by  the  House  Committee  on 
Manufactures : 

"It  is  not  a  matter  of  very  great  consolation  to  know  that, 
at  the  end  of  thirty  years  of  its  operation,  this  government 
finds  its  debt  increased  $20,000,000,  and  its  revenue  in- 
adequate to  its  expenditure ;  the  national  domain  impaired, 
and  $20,000,000  dollars  drawn  from  the  people  by  internal 
taxation,  $341,000,000  by  impost,  yet  the  public  treasury 
dependent  on  loans ;  in  profound  peace,  and  without  national 
calamity;  the  country  embarrassed  with  debts,  and  real 
estate  under  rapid  depreciation;  the  markets  of  agricul- 
ture, the  pursuits  of  manufacture,  diminished  and  declining ; 
commerce  struggling,  not  to  retain  the  carrying  of  the 
produce  of  other  nations,  but  our  own.  There  is  no  na- 
tional interest  which  is  in  a  healthful,  thriving  condition: 
the  nation  at  large  is  not  so ;  the  operations  of  the  govern- 
ment and  individuals  alike  labor  under  difficulties  which 
are  felt  by  all." 


CHAPTER  XI 
THE  DEPRESSION  OF  1825 

Most  authorities  attribute  our  troubles  in  1825  entirely 
to  the  European  reverses  of  that  year,  during  which  Eng- 
land experienced  one  of  her  greatest  catastrophes.  Ameri- 
can obligations  were  called  in,  and  the  banking  houses  of 
New  York  and  Philadelphia  became  seriously  embarrassed. 
The  English  cotton  factories  curtailed  production  and  the 
price  of  cotton  fell.  The  New  Orleans  banks,  accustomed 
to  lend  freely  on  cotton  securities,  were  the  first  to  break 
down.  Many  of  the  cotton  factors  failed  and  the  Cotton 
Exchange  was  prostrated.  The  general  business  of  the 
country  felt  the  shock  only  slightly  and  it  passed  over 
without  any  serious  consequences.  But  the  stringency  of 
that  year  would  probably  have  resulted  in  a  condition  as 
bad  as  in  1819  had  it  not  been  for  the  able  management  of 
Nicholas  Biddle  who  guided  the  affairs  of  the  Bank  of  the 
United  States  at  the  time.  The  bank  rendered  splendid 
service  in  getting  business  back  on  its  feet.  Mr.  Biddle 
at  that  time  said  that  the  crisis  of  1825  was  the  most  severe 
that  England  had  ever  experienced,  superinduced  as  it  was 
by  the  wild  American  speculation  in  cotton  and  mines. 
Cotton  cloth  fell  from  eighteen  to  thirteen  cents  per  yard ; 
and  out  of  four  thousand  weavers  employed  in  Philadelphia 
in  1825  not  more  than  one  thousand  remained.  The,  reaction 
of  liquidation  had  spent  its  force  by  1826  and  money  was 
again  abundant. 

At  that  time  commercial  crises  of  the  most  tremendous 
proportions  were  running  through  not  only  England,  but 
other  parts  of  Europe ;  it  failed,  however,  to  spread  seriously 
to  the  United  States.  A  small  boom  had  set  in  and  stock 
companies  started  their  usual  wild-catting.  As  an  instance, 
three  millions  were  subscribed  to  the  "New  Jersey  Protec- 


122  HISTORY  OF  BUSINESS  DEPRESSIONS 

tion  Company"  in  one  day.  But  in  July,  when  the  decline 
on  the  London  market  was  reported,  the  want  of  hard 
money  forced  itself  into  notice.  Exchange  on  England  rose 
from  5  per  cent  to  10  per  cent ;  the  discount  on  New  Orleans 
notes  from  3  per  cent  to  50  per  cent,  and  on  the  4th  of 
December  it  had  fallen  back  to  4  per  cent.  The  depression 
was  short-lived  because  inflation  had  not  run  its  full  course 
nor  reached  undue  proportions. 

It  was  the  widespread  interest  in  the  financial  and  busi- 
ness situation  at  this  period  that  caused  the  newspapers  to 
start  their  financial  pages.  These  consisted  mostly  of  re- 
ports of  conditions  furnished  by  a  brokerage  house  and  this 
practice  continued  up  until  recent  years. 


HISTORY  OF  BUSINESS  DEPRESSIONS  123 

WEATHER  BAROMETER  OF  OUR  BUSINESS  HISTORY 


Year 

Conditions 

Year 

Conditions 

Year 

Conditions 

1781 

Fair. 

1829 

Fair. 

1877 

Fair. 

1782 

Fair 

1830 

Fair. 

1878 

Storm. 

1783 

Fair. 

1831 

Fair. 

1879 

Clearing. 

1784 

Partly  Cloudy. 

1832 

Fair. 

1880 

Fair. 

1785 

Cloudy. 

1833 

Partly  Cloudy. 

1881 

Fair. 

1786 

Storm. 

1834 

Fair. 

1882 

Fair. 

1787 

Stormy. 

1835 

Fair. 

1883 

Partly  Cloudy. 

1788 

Bad. 

1836 

Threatening. 

1884 

Storm. 

1789 

Extremely  Bad. 

1837 

Hurricane. 

1885 

Fair. 

1790 

Clearing. 

1838 

Stormy. 

1886 

Fair. 

1791 

Clear. 

1839 

Continued  Storm. 

1887 

Fair. 

1792 

Fair. 

1840 

Clearing. 

1888 

Fair. 

1793 

Fair. 

1841 

Fair 

1889 

Threatening. 

'794 

Fair. 

1842 

Fair. 

1890 

Storm. 

»795 

Fair. 

1843 

Fair. 

1891 

Fair. 

1796 

Fair. 

1844 

Fair. 

1892 

Fair. 

1797 

Threatening. 

1845 

Fair. 

1893 

Storm. 

1798 

Squall. 

1846 

Fair. 

1894 

Stormy. 

1799 

Clearing. 

1847 

Storm. 

1895 

Continued 

1800 

Fair. 

1848 

Storm. 

Stormy. 

1801 

Fair. 

1849 

Fair. 

1896 

Clearing. 

1802 

Fair. 

1850 

Fair. 

1897 

Fair. 

1803 

Squall. 

1851 

Squall. 

1898 

Fair. 

1804 

Fair. 

1852 

Fair. 

1899 

Fair. 

1805 

Fair. 

1853 

Fair. 

1900 

Fair. 

1806 

Fair. 

1854 

Fair. 

1901 

Fair. 

1807 

Fair. 

1855 

Fair. 

1902 

Fair. 

1808 

Stormy. 

1856 

Fair. 

1903 

Squall. 

1809 

Stormy. 

1857 

Tornado. 

1904 

Fair. 

1810 

Clearing. 

1858 

Clearing. 

1905 

Fair. 

1811 

Fair. 

1859 

Fair. 

1906 

Fair. 

1812 

Fair. 

1860 

Storm. 

1907 

Cyclone. 

1813 

Fair. 

1861 

Stormy 

1908 

Clearing. 

1814 

Storm. 

1862 

Fair. 

1909 

Fair. 

1815 

Fair. 

1863 

Fair. 

1910 

Fair. 

1816 

Fair. 

1864 

Fair. 

1911 

Fair. 

1817 

Fair. 

1865 

Fair. 

1912 

Fair. 

1818 

Threatening. 

1866 

Fair. 

1913 

Partly  Cloudy. 

1819 

Hurricane. 

1867 

Fair. 

1914 

Storm. 

1820 

Gale. 

1868 

Threatening. 

1915 

Partly  Cloudy. 

1821 

Clearing. 

1869 

Black  Friday. 

1916 

Fair. 

1822 

Fair. 

1870 

Fair. 

1917 

Fair. 

1823 

Fair. 

1871 

Fair. 

1918 

Fair. 

1824 

Fair. 

1872 

Fair. 

1919 

Fair. 

1825 

Storm. 

1873 

Cyclone. 

1920 

Partly  Cloudy. 

1826 

Fair. 

1874 

High  Winds. 

1921 

Stormy. 

1827 

Fair. 

1875 

Clearing. 

1922 

Stormy. 

1828 

Squall. 

1876 

Fair. 

CHAPTER  XII. 
THE  DEPRESSION  OF  1837-39 

Let  us  compare  conditions  in  this  country  after  passing 
through  the  depression  of  1819  with  those  that  existed  in 
1836,  after  a  period  of  sixteen  years  of  prosperity  and  the 
accumulation  of  wealth,  marred  only  by  minor  stoppages 
in  1825  and  1828.  The  following  is  taken  from  the  report 
of  Secretary  of  the  Treasury  Rush,  under  President 
Jackson : 

"The  receipts  of  the  existing  year  is  greater  by  nearly 
two  millions  of  dollars  than  had  been  foreseen,  with  a 
prospect  of  income  for  the  next  scarcely  less  abundant,  the 
receipts  of  the  last  four  years  presenting  a  large  and  grati- 
fying excess  over  those  of  the  four  years  preceding ;  the  for- 
eign commerce  of  the  country  in  a  state  of  solid  prosperity, 
from  the  improved  condition  of  its  leading  departments  of 
industry  at  home,  and  consequent  increase  in  the  exportation 
of  its  products;  the  increase  of  its  tonnage  (that  founda- 
tion of  naval  strength,  as  well  as  commercial  riches)  keep- 
ing pace  with  the  increase  of  commerce;  the  public  debt 
annually  and  rapidly  decreasing  under  the  application  of 
surplus  funds;  the  public  revenue  preserved  at  an  equal 
value  in  every  part  of  the  Union,  through  the  power  of 
transfers  promptly  made  by  the  Bank  of  the  United  States, 
without  expense  or  risk  to  the  nation;  and  the  currency 
maintained  in  a  healthful  state  by  the  same  institution. 
Such  is  the  great  outline  of  the  financial  and  commercial 
condition  of  the  country,  a  condition  of  the  result  of  good 
laws  faithfully  administered,  and  of  the  aggregate  industry 
of  an  enterprising  free  people." 

Foreign  capital  became  available  in  great  quantities  for 
loans  to  the  American  people  after  the  recovery  from  the 
crisis  of  1825  in  England,  and  specie  imports  kept  up  with 
an  excess  of  imports  of  goods.  As  evidence  of  the  heavy 
loans  which  Europe  was  making  to  us,  imports  in  seven 
years  amounted  to  $140,700,000.  The  agricultural  and  in- 


HISTORY  OF  BUSINESS  DEPRESSIONS  125 

dustrial  output  in  1836  totaled  $2,600,000,000,  an  increase 
of  three-fold  in  fifteen  years,  a  record  that  had  never  be- 
fore been  approached  since  civilization  began. 

But  a  crisis  was  fast  approaching  when  President  Van 
Buren  took  office.  It  was  already  being  felt  in  New  York, 
and  a  committee  rushed  to  Washington  to  ask  him  to  re- 
scind the  specie  circular.  Van  Buren,  however,  refused, 
holding  that  his  election  denoted  the  approval  of  Jackson's 
hard  money  policy  by  the  people. 

While  a  crash  was  unavoidable  sooner  or  later,  because 
of  the  instability  of  the  banking  system  and  the  heavy  obli- 
gations incurred  for  speculative  purposes,  most  writers  at- 
tribute the  starting  of  the  trouble  to  Jackson's  specie  circu- 
lar requiring  that  only  gold  and  silver  and  notes  redeem- 
able in  gold  and  silver  be  used  in  payment  for  public  lands. 
The  crisis  was  precipitated  in  the  western  states,  where 
there  were  many  "wild  cat"  banks  that  had  issued  irredeem- 
able paper  currency.  The  last  of  the  national  debt  had 
been  paid  in  1835,  and  the  Federal  Government  had  started 
a  system  of  distributing  surplus  funds  to  the  several  states. 
It  is  claimed  that  had  the  United  States  Bank  been  re- 
chartered  this  panic  could  have  been  avoided.  How  much 
stronger  the  financial  structure  would  have  been  under  the 
United  States  Bank  is  only  to  be  surmised.  There  were 
oth^r  influences,  however,  which  added  to  the  growing  dif- 
ficulties, and  any  one  of  them  might  have  had  as  much  to  do 
with  the  final  outbreak  as  the  other  one.  Crop  failures  in 
1835  to  1837  left  the  farmers  without  ability  to  meet  their 
obligations  in  the  western  states  where  the  trouble  started. 
The  panic  and  bank  failures  in  England  the  preceding  year, 
1836,  were  also  factors.  The  prosperity  of  the  preceding 
years  had  stimulated  large  importations  of  European  goods, 
leaving  a  big  trade  balance  in  Europe's  favor  which  necessi- 
tated the  sending  out  of  specie,  leaving  the  banks  of  this 
country  with  means  insufficient  to  meet  the  needs  in  a 
crisis.  While  it  is  true  Europe's  trade  balance  was  largely 


126  HISTORY  OF  BUSINESS   DEPRESSIONS 

reinvested  in  our  securities,  interest  payments  in  them- 
selves were  large  and  necessitated  exports  of  specie. 

A  connection  is  here  again  shown  between  the  economic 
affairs  of  this  country  and  Europe  in  the  failure  of  important 
business  houses  in  England  at  the  end  of  1836,  which  caused 
a  lessening  in  the  demand  for  cotton,  thus  involving  the 
South.  This  of  itself  should  not  have  caused  the  panic  if 
there  had  not  been  the  accompanying  speculation.  In  fact, 
not  until  recent  years  have  our  commercial  relations  with 
the  outside  world  been  such  as  to  necessarily  cause  a  de- 
pression by  reason  of  one  existing  in  another  country.  Even 
now  such  an  authority  as  Forbes  claims  that  we  can  be 
economically  independent  of  Europe  and  the  outside  world 
if  our  own  commerce  is  well  and  properly  regulated. 

As  an  instance  of  the  wave  of  extravagance  that  preceded 
this  depression  the  figures  of  the  public  debt  of  the  states 
may  be  cited.  At  the  beginning  of  the  decade,  1830,  the 
debt  was  $26,470,417,  which  mounted  to  $170,000,000  in 
1838,  a  year  after  the  depression  had  set  in.  Practically 
all  of  this  enormous  expenditure  had  gone  into  public  im- 
provements, such  as  roads,  canals  and  railroads — most  of 
them  enterprises  that  were  premature  and  unnecessary. 
Many  were  extravagantly,  if  not  corruptly  managed,  mil- 
lions of  dollars  being  sunk  in  useless  undertakings.  When 
the  debts  so  easily  contracted  began  to  press,  several  of  the 
states  repudiated  their  indebtedness,  notable  among  tHem 
Mississippi,  Louisiana,  Maryland,  Pennsylvania,  Indiana, 
Illinois  and  Michigan.  Some  of  these  afterward  paid  in 
part  or  in  whole. 

Previous  to  the  crisis  of  1837  money  was  cheap  and  easy. 
The  high  credit  then  enjoyed  by  the  American  states,  which 
had  been  greatly  enhanced  by  the  payment  of  the  national 
debt,  enabled  them  to  borrow  enormous  sums  abroad, 
especially  in  England,  where  capital  had  been  accumulating, 
at  comparatively  moderate  rates  of  interest. 

When  the  depression  came  on  public  works  already  built 


HISTORY  OF  BUSINESS  DEPRESSIONS  127 

by  the  states  were  sold  to  private  interests  in  many  cases, 
and  this  period  marked  the  last  widespread  effort  on  the 
part  of  individual  states  to  appropriate  money  for  state- 
owned  improvements  and  utilities.  The  people  resenting 
the  suffering  caused  by  the  depression  eagerly  voted  into 
many  state  constitutions  prohibition  of  the  use  of  state 
funds  or  credit  for  specified  internal  improvements.  Up  to 
that  time  railroads  had  been  built  or  largely  helped  by  the 
use  of  public  funds.  These  now  passed  into  the  hands  of 
private  individuals  and  corporations. 

The  panic  began  on  May  10th,  when  the  banks  of  New 
York  City  decided  to  suspend  specie  payments.  Within 
two  months  the  catastrophe  had  spread  to  all  the  financial 
and  industrial  centers  of  the  country.  Another  period  of 
reckless  speculation  had  come  to  a  sudden  close.  The  dis- 
credited bank  notes  depreciated  in  value  and  prices  shrank 
to  a  hard  money  level.  Factories  and  workshops,  organized 
on  a  boom  basis,  closed  in  anticipation  of  a  falling  market. 
Thousands  of  operatives  were  discharged,  and  the  cities 
were  crowded  with  the  unemployed.  All  classes  curtailed 
expenditure,  the  demand  for  goods  being  thus  further  re- 
duced. Imports  exceeded  exports  during  the  speculative 
period  of  1830  to  '37,  leaving  a  staggering  trade  balance 
against  us  amounting  to  $140,000,000.  Failure  of  the  New 
York  banks  dragged  down  many  business  houses  within  a 
few  months.  The  public,  unable  to  withdraw  deposits,  grew 
desperate,  and  the  militia  was  called  in  to  protect  the  terri- 
fied financiers.  The  panic  spread  next  to  Philadelphia, 
whose  banks  were  in  solvent  condition  but  were  unable  to 
stem  the  onrushing  tide  of  frenzy.  When  the  panic  had 
swept  the  country  618  -banks  had  failed  within  the  year. 
New  England  felt  the  shock  less  than  any  other  section. 
Although  the  general  government  was  free  from  debt,  there 
was  no  money  for  current  expenses  and  Congress  was 
called  in  extra  session  and  voted  ten  million  dollars  in 
Treasury  notes  to  meet  the  emergency. 


128  HISTORY   OF  BUSINESS   DEPRESSIONS 

Although  the  act  passed  Congress,  President  Jackson 
vetoed  it.  The  easterners  accused  him  of  being  friendly 
with  "wild  cat"  bankers  of  the  West,  where  he  hailed  from, 
being  a  Tennessean.  The  western  bankers  wanted  to  de- 
feat the  national  bank  because  they  claimed  it  restricted 
development  of  the  newer  states.  As  there  was  no  govern- 
ment paper  issue,  and  not  sufficient  gold  and  silver  to  supply 
the  needs,  a  stringency  existed.  This  breach  was  filled  by 
notes  issued  by  state  banks.  New  banks  sprung  up  in  every 
state  until  they  had  increased  in  number  from  329  to  788  in 
the  period  of  eight  years  preceding  the  crisis  of  1837. 
During  the  same  interval  the  volume  of  the  currency  was 
trebled  and  bank  loans  were  extended  at  an  even  more  rapid 
rate. 

When  the  Second  Bank  of  the  United  States  failed  to  re- 
charter  there  was  no  means  of  checking  speculation.  The 
state  banks  went  wild  and  expansion  proceeded  beyond 
reason.  Jackson's  enemies  said  the  panic  was  due  to  the 
placing  of  public  funds  in  the  state  banks,  but  that  could 
hardly  be  taken  seriously,  because  deposits  were  only  $41,- 
500,000  at  the  time.  It  is  obvious  that  that  would  not  have 
been  a  large  factor  in  a  healthy  money  market,  and  a  still 
smaller  factor  in  a  period  of  inflation.  It  was  not  the  plac- 
ing of  public  funds  in  the  state  banks,  but  the  over-issue  of 
state  bank  notes,  that  caused  the  trouble.  There  is  hardly 
a  connection  between  the  two.  Had  the  counsel  of  Presi- 
dent Biddle  been  heeded  as  early  as  1833  the  panic  of  1837 
might  have  been  avoided. 

During  the  debate  on  the  Second  National  Bank  question 
in  1832  Senator  Clayton,  of  Delaware,  prophesied  the  panic 
of  1837  in  these  words :  "In  less  than  four  years  the  pecuni- 
ary distress,  the  commercial  embarrassments,  consequent 
upon  the  destruction  of  the  United  States  Bank,  must  ex- 
ceed anything  which  has  ever  been  known  in  our  history. 
Overtrading  and  speculation  on  false  capital  in  every  part 
of  the  country;  that  rapid  fluctuation  in  the  standard  of 
value  for  money,  which,  like  the  unseen  pestilence,  withers 


HISTORY  OF  BUSINESS  DEPRESSIONS  129 

all  the  efforts  of  industry,  while  the  sufferer  is  in  utter 
ignorance  of  the  cause  of  his  destruction ;  bankruptcies  and 
ruin,  at  the  anticipation  of  which  the  heart  sickens,  must 
follow  in  the  long  train  of  evils  which  are  assuredly  be- 
fore us." 

Moore  in  his  "Industrial  History  of  the  American  Peo- 
ple" blames  President  Jackson  in  these  words :  "Jackson,  our 
greatest  financial  blunderer,  killed  the  idea  and  brought 
the  Nation  to  the  panic  of  1837  with  his  ill-timed  attempts 
to  stop  a  movement  that  he  himself  had  started." 

Thomas  H.  Benton,  who  was  in  the  Senate  at  the  time, 
says  in  his  "Thirty  Years'  View"  that  the  panic  was  manu- 
factured by  interests  connected  with  the  Second  National 
Bank,  who  sought  to  bring  on  a  crisis  in  order  to  embarrass 
President  Jackson. 

"For  this  purpose  loans  and  accommodations  were  to 
cease  at  the  mother  bank  and  all  its  branches,  and  in  all  the 
local  banks  over  which  the  national  bank  had  control ;  and 
at  the  same  time  that  discounts  were  stopped,  curtailments 
were  made ;  and  all  business  men  called  on  for  the  payment 
of  all  they  owed,  at  the  same  time  all  the  usual  sources  of 
supply  were  stopped.  This  pressure  was  made  to  fall  upon 
the  business  community,  especially  upon  large  establishments 
employing  a  great  many  operatives  so  as  to  throw  as  many 
laboring  people  as  possible  out  of  employment.  At  the  same 
time  politicians  engaged  in  making  panic  had  what  amounts 
they  pleased,  an  instance  of  a  loan  of  $100,000  to  a  single 
one  of  these  agitators  being  detected ;  and  a  loan  of  $1,100,- 
000  to  a  broker,  employed  in  making  distress,  and  in  reliev- 
ing it  in  favored  cases  at  a  usury  of  two  and  a  half  per 
centum  per  month.  In  this  manner  the  business  community 
was  oppressed,  and  in  all  parts  of  the  Union  at  the  same 
time. 

"The  first  step  in  this  policy  was  to  get  up  distress  meet- 
ings— a  thing  easily  done — and  then  to  have  these  meet- 
ings properly  officered  and  conducted.  Men  who  had  voted 
for  Jackson,  but  now  renounced  him,  were  procured  for 
president,  vice-presidents,  secretaries,  and  orators;  distress 
orations  were  delivered;  and,  after  sufficient  exercise  in 
that  way,  a  memorial  and  a  set  of  resolves,  prepared  for  the 


130  HISTORY  OF  BUSINESS  DEPRESSIONS 

occasion,  were  presented  and  adopted.  After  adoption,  the 
old  way  of  sending  by  mail  was  discarded,  and  a  deputation 
selected  to  proceed  to  Washington  and  make  delivery  of 
their  lugubrious  document.  These  memorials  generally 
came  in  duplicate,  to  be  presented  in  both  Houses  at  once, 
by  a  Senator  from  the  State  and  the  representative  from 
the  district.  Yet,  Van  Buren,  who  was  supported  by  Jack- 
son, was  elected  overwhelmingly,  and  the  country  beheld 
'the  gratifying  spectacle  of  a  full  and  overflowing  treasury, 
instead  of  the  empty  one  which  had  been  predicted;  and 
left  to  Congress  the  grateful  occupation  of  further  reducing 
taxes,  instead  of  the  odius  task  of  borrowing  money,  as  had 
been  so  loudly  anticipated  for  six  months  past.'" 

Jackson's  antagonism  to  the  Second  Bank  of  the  United 
States  had  caused  large  amounts  of  treasury  revenues  to  be 
deposited  in  state  banks.  The  national  debt  had  been 
paid  and  this  brought  on  a  great  period  of  expansion  and 
the  organization  of  all  these  new  banks  which  went  wild  in 
a  general  inflation  of  the  circulation.  The  circulating  notes 
of  all  banks  exclusive  of  the  Bank  of  the  United  States 
rose  in  seven  years  prior  to  1837  from  $61,000,000  to  $149,- 
000,000.  The  Bank  of  the  United  States  after  failing  to  re- 
charter  had  become  the  United  States  Bank  of  Pennsylva- 
nia, having  been  chartered  by  that  State,  and  it  claimed  to 
have  kept  its  resources  and  organization  intact.  But  this 
bank  failed  with  the  rest  of  them.  As  an  example  of  how 
the  public  confidence  was  undermined  by  the  terrible  crash, 
it  may  be  said  that  the  banks  of  Philadelphia  made  three 
attempts  to  resume  payment  on  their  notes  from  1837  to 
1841,  and  each  attempt  resulted  in  failure.  The  banks  of 
New  York  and  New  England  were  the  first  to  resume,  hav- 
ing imported  quantities  of  specie  from  abroad.  It  was 
seven  years  before  the  banks  resumed  a  state  of  regularity. 
During  this  period  "they  reduced  their  circulation  from 
$149,000,000  in  1837  to  $58,000,000  in  1843,  which  is  $3,- 
000,000  below  the  amount  at  which  it  stood  thirteen  years 
before." 

In  the  three  years  from  1834  to  1837  one  hundred  and 


HISTORY  OF  BUSINESS   DEPRESSIONS  131 

ninety-four  new  banks  were  organized  in  the  United  States. 
This  includes  only  those  that  were  recorded  with  the  Sec- 
retary of  the  Treasury  at  Washington,  and  the  number  does 
not  include  a  great  many  institutions  known  as  "wild-cat" 
banks.  It  was  a  peculiarity  that  while  Jackson  was  in- 
fluenced by  his  western  friends,  yet  he  issued  a  specie  cir- 
cular which  he  must  have  known  would  have  brought  de- 
struction to  the  West,  since  it  was  sure  to  cause  a  run  for 
specie  upon  the  western  banks,  which  had  little  or  none. 
That  Jackson  was  honest  there  is  little  doubt.  Apparently 
he  wanted  a  larger  distribution  of  money  so  as  to  develop 
the  West  and  South,  but  he  Wanted  the  money  to  be  sound. 
No  doubt  Jackson  saw  the  way  things  were  going,  that  the 
country  was  threatened  with  a  panic,  and  while  he  precipi- 
tated it,  he  probably  foresaw  that  it  might  have  been  worse 
had  it  been  allowed  to  continue. 

It  was  during  the  distress  of  this  period  that  the  Free 
Banking  Law  was  agitated  and  put  into  effect  in  several 
states,  the  story  of  which  is  a  history  in  itself.  In  general, 
these  laws  granted  the  privilege  to  associations  and  indi- 
viduals to  issue  paper  money  unrestrained,  and  the  practice- 
was  carried  on  for  years  in  the  various  states,  always  add- 
ing to  business  troubles  as  they  revolved  in  their  cycles.. 
During  the  period  of  specie  payment  suspension  in  1837,. 
ending  with  the  resumption  in  1842,  the  state  banks  held 
specie  amounting  on  an  average  to  31.7  per  cent  of  their 
circulation  and  18  per  cent  of  their  circulation  in  deposits. 
This  period  practically  swept  the  Michigan  banks  out  of 
existence.  By  the  end  of  1839  only  two  chartered  banks 
and  four  free  banks  were  doing  business  in  the  state.  Forty- 
two  were  in  the  hands  of  receivers  and  many  others  had 
gone  out  of  business. 

Frequent  investigations  were  made  as  to  causes  of  the 
panic.  The  Ohio  Legislature  by  a  resolution  required  tEe 
auditor  of  the  state  to  submit  to  the  banks  twenty  different 
questions  inquiring  into  the  causes  which  led  them  to  sus- 


132  HISTORY  OF  BUSINESS  DEPRESSIONS 

pend  specie  payment.  One  banker  replied,  "The  causes 
which  led  to  the  suspension  of  specie  payments  by  the  Ohio 
banks,  in  May  last,  were  so  notorious  at  the  time  the  sus- 
pension took  place  that  we  did  suppose  they  were  known  to 
everyone.  But  it  seems  to  be  otherwise."  The  great  slump 
of  business  activity  brought  about  a  serious  decline  in  the 
government  revenues,  and  as  a  result,  the  tariff  duties  which 
had  been  gradually  lowered  was  raised  to  a  level  of  20  per 
cent,  which  was  the  highest  tariff  the  country  had  ex- 
perienced up  to  that  time. 

It  is  no  wonder  that  there  was  inflation  in  that  period. 
There  was  everything  to  bring  inflation.  Things  never 
looked  so  rosy.  In  1835  it  was  estimated  that  the  receipts 
of  the  treasury  would  be  $20,000,000 ;  actual  receipts  proved 
to  be  $35,000,000.  Suppose  such  a  condition  existed  today. 
Would  it  not  start  a  great  boom  in  business?  In  1836  the 
national  government  started  distributing  its  surplus  to  the 
various  states.  Each  quarter  an  installment  of  $9,367,214 
was  sent  out,  a  total  of  over  $37,000,000  a  year.  Think  of 
such  a  condition  existing  today.  The  confidence  it  would 
instill  in  the  public  mind.  Suppose  we  were  out  of  debt, 
our  taxes  low,  a  great  surplus  of  money  to  be  distributed, 
we  would  probably  lose  our  heads  the  same  as  our  ancestors 
did  in  those  days. 

The  increase  in  sales  of  public  lands  had  been  fairly 
steady  and  healthful  up  to  1834,  when  the  sales  were 
4,659,218  acres  and  the  amount  received  was  $6,099,981. 
The  next  year  witnessed  the  sale  of  12,364,478  acres  and 
receipts  of  $15,999,804,  and  1836  witnessed  sales  of  20,- 
074,870  acres  and  receipts  of  $25,167,833.  That  these 
sales  were  speculative  in  character  is  indicated  'by  the 
steady  decline  in  receipts  after  1837,  until  they  fell  in  1842 
to  only  $1,417,972.  With  the  rapid  sales  of  its  lands  the 
Government  was  soon  able  to  pay  off  the  public  debt,  and 
had  still  a  surplus  of  $50,000,000  in  the  treasury.  But  the 
Federal  Treasury  was  bankrupt  when  the  sale  of  public 


HISTORY  OF  BUSINESS  DEPRESSIONS  133 

lands  dropped  to  one-twenty-fifth  its  former  figures.  Many 
of  the  individual  states,  particularly  the  newer  ones,  were  in 
the  most  straightened  circumstances. 

Previous  years  had  been  flush  times  in  Alabama  as  a 
writer  of  that  State's  history  portrays:  "So  complete  was 
the  intoxication  of  the  people  with  the  paper  money  craze 
that  the  General  Assembly  on  January  9,  1836,  passed  an 
act  abolishing  direct  taxation  in  the  State  and  setting  aside 
$100,000  of  the  bank  money  to  defray  the  expenses  of  the 
State  government.  The  crisis  of  1837  led  to  an  investiga- 
tion of  the  discounts  and  it  was  found  that  over  $6,000,000 
were  worthless.  Confidence  in  the  paper  money,  'supported 
by  the  faith  and  credit  and  wealth  of  the  State,'  to  use  the 
favorite  phrase  of  the  champions  of  government  paper 
money,  suddenly  collapsed  and  with  it  the  whole  structure 
of  business  and  credit  in  Alabama." 

The  old  adage,  "It's  an  ill  wind  that  blows  nobody  good," 
obtains  in  the  matter  of  depressions  as  well  as  other  things. 
The  canals  built  during  the  high  tide  years  enabled  produce 
of  the  Central  West  to  reach  the  Atlantic  seaboard,  and  the 
agricultural  exports  of  the  State  of  Ohio,  for  instance,  grew 
rapidly  without  recession  during  the  panic  from  an  equiva- 
lent of  544,000  bushels  of  wheat  in  1835  to  3,800,000  in  1840. 

Banking  figures  again  show  the  havoc  wrought.  In  the 
beginning  of  the  depression  in  1837  the  788  national  banks 
were  capitalized  for  $290,800,000,  with  a  circulation  of 
$149,200,000  and  loans  of  $525,100,000.  Five  years  later, 
at  the  end  of  the  depression,  shows  691  banks,  a  capital  of 
$228,900,000,  a  circulation  of  only  $58,600,000,  and  loans  re- 
duced to  $254,500,000.  Over-expansion  of  course  rendered 
its  due  share  with  its  accompanied  extension  of  undue 
credit  for  speculative  purposes. 

Altogether  about  900  banks  failed  during  the  years  1837 
and  1838.  It  was  at  this  time  that  legislation  was  invoked 
prohibiting  loans  by  commercial  banks  on  real  estate  mort- 
gages, the  attitude  being  taken  that  short  time  paper  and 


134  HISTORY  OF  BUSINESS  DEPRESSIONS 

quicker  assets  should  be  the  only  basis  for  loans.  It  is  only 
recently  that  this  law  has  been  changed,  and  during  the 
eighty  years  that  it  was  in  existence  the  resources  of  the 
country  more  and  more  got  into  the  hands  of  speculative 
interests  instead  of  actual  developers  of  the  country. 

According  to  Dewey,  "the  value  of  real  estate  in  New 
York  had  in  six  months  depreciated  more  than  $40,000,000 ; 
in  two  months  there  had  been  more  than  250  failures ;  there 
had  been  a  decline  of  $20,000,000  in  the  value  of  the  stocks 
of  railroads  and  canals  which  centered  in  New  York;  the 
value  of  merchandise  in  warehouses  had  fallen  30  per  cent ; 
and  within  a  few  weeks  20,000  persons  had  been  discharged 
by  their  employers." 

New  Orleans  and  New  York,  particularly,  had  experi- 
enced building  booms.  More  than  fifteen  hundred  houses 
were  erected  in  New  York  City  between  January  1  and 
September  1,  1836.  The  depression  years,  from  1837  to 
1839,  produced,  according  to  some  supposedly  accurate  re- 
ports of  1841,  33,000  failures,  involving  a  loss  of 
$440,000,000. 

"Bicknall's  Counterfeit  Detector  and  Bank-Note  List  of 
January  1,  1839,  contained  the  names  of  fifty-four  banks 
that  had  failed  at  different  times;  of  twenty  fictitious 
banks,  the  pretended  notes  of  which  were  in  circulation ;  of 
forty-three  other  banks,  for  the  notes  of  which  there  was 
no  sale;  of  two  hundred  and  fifty-four  banks,  the  notes  of 
which  had  been  counterfeited  or  altered;  and  enumerated 
thirteen  hundred  and  ninety-five  descriptions  of  counter- 
feited or  altered  notes  then  supposed  to  be  in  circulation, 
of  denominations  from  one  dollar  to  five  hundred." 

This  depression  reduced  our  foreign  trade  from  $300,- 
000,000  at  its  highest  figure  in  1836  to  $125,000,000  in  1837. 

Some  writers  of  that  time  said  the  panic  was  due  to  the 
great  New  York  fire  in  1835  which  destroyed  $18,000,000 
worth  of  property  and  burned  528  houses.  This  confla- 
gration could  have  had  very  little  effect  on  the  depression, 
however,  and  at  the  time  the  Nation  was  proud  that  she 
could  undergo  such  a  conflagration  without  ill  effect  and 
boasted  of  her  strength. 


HISTORY  OF  BUSINESS  DEPRESSIONS  135 

An  article  written  by  a  New  York  newspaper  man  at 
that  time  read:  "The  South  and  Southwest  were  the  first 
to  give  way.  The  cotton  interest  was  prostrated.  Infla- 
tion had  stimulated  production  and  inflated  in  turn  manu- 
facturers of  England."  Reaction  was  bound  to  set  in,  and 
when  it  came  at  this  time  bankers  and  merchants  who  had 
made  large  advances  on  cotton  became  panic-stricken. 

New  York  and  Philadelphia  papers  of  March  27  and  28, 
1837,  after  receiving  the  news  of  the  cotton  break  at  New 
Orleans,  predicted  that  the  flurry  would  be  over  within  a 
few  days  and  belittled  the  incident,  seeking  to  calm  the 
people.  The  New  York  Herald  finally  came  out  with  the 
true  situation  and  was  followed  on  April  6  by  the  New  York 
Transcript,  which  said :  "It  is  estimated  that  the  Southern 
merchants  do  not  pay  five  cents  on  the  dollar  what  they  owe 
in  New  York." 

The  following  excerpts  were  taken  from  New  York  papers 
of  that  day : 

"May  4:  John  Fleming,  president  of  Merchants  Bank, 
fell  dead  from  excessive  anxiety  with  regard  to  the  affairs 
of  the  bank.  A  run  set  in  on  all  banks." 

"May  5:  Merchants  failed  by  whole  blocks.  The  Ameri- 
can said,  "It  is  vain  to  disguise  that  the  whole  frame  of 
society  is  out  of  joint." 

"May  6:  The  failures  are  worse.  U.  S.  Bank  Stock,  for 
first  time  in  twenty  years,  fell  below  par.  Not  a  stock  in 
the  market  brought  par." 

"May  8 :  Steady  drain  on  banks.  Failures  too  numerous 
to  chronicle.  No  bank  stock  at  par." 

"May  9:  Furious  run  on  all  banks.  Depositors  and  bill 
holders  mingling  in  one  indiscriminate  mass,  all  desperate 
to  get  their  money." 

"May  10:  All  banks  suspended.  Chaos,  bewilderment, 
despondency  and  lamentation  were  the  order  of  the  day. 
Three  hundred  firms  failed  in  New  York." 

In  February  1837  flour  reached  $12  a  barrel.  Men  de- 
prived of  work  and  in  a  distressed  condition  started  riots. 
The  rumor  was  current  that  dealers  had  combined  and  the 
unemployed  men  were  incensed.  Several  commission  houses 
were  broken  into,  and  when  the  police  and  mayor  inter- 


136  HISTORY  OF  BUSINESS  DEPRESSIONS 

fered  they  were  man-handled.  The  riots  were  finally  stop- 
ped by  the  promise  of  the  merchants  to  give  flour  to  the 
poor. 

A  newspaper  of  that  period  gave  as  one  of  the  causes  of 
the  crisis,  "General  neglect  of  the  homelier  and  manlier 
occupations,  particularly  farming  and  excessive  fondness 
of  the  meaner  callings,  such  as  store-keeping,  banking  and 
speculation." 

The  newspaper  paragraphers  wrote  humorous  poetry 
and  printed  jokes.  Apparently,  thousands  of  ruined  men 
had  nothing  left  but  a  sense  of  humor.  They  made  fun  of 
different  commodities  that  were  passed  for  money.  The 
New  York  Commercial  Advertiser  said,  "The  egg  currency 
is  better  and  more  convenient  than  that  of  some  countries 
we  wot  of — Texas,  for  instance,  where  they  pay  in  cows 
for  large  sums  and  throw  in  the  calves  for  change." 

As  usual,  immediately  after  a  crisis,  politics  entered  into 
the  ascribed  causes;  the  Whigs  blamed  Jackson  and  the 
Democrats.  The  New  York  American  said,  "When  the 
cause  of  our  calamities  is  traced  mainly  to  misgovernment, 
we  hear  it  said,  'Oh,  for  God's  sake,  do  not  make  this  a  po- 
litical matter.'  Not  make  it  a  political  matter?  Why,  it  is 
from  politics — base,  vile,  mercenary,  personal  politics — 
that  the  evil  is  what  it  is." 

From  March  1st  to  April  18th  one  hundred  and  sixty- 
eight  business  firms  failed  in  New  York  City  alone.  There 
was  considerable  agitation  against  the  banks.  A  town 
meeting  is  recorded  as  being  held  in  Philadelphia,  at 
which  resolutions  severely  condemning  the  banks  were 
passed.  An  anti-bank  convention  was  held  at  Harrisburg 
on  July  4,  1837,  which  issued  an  address  to  the  people  of 
the  State,  in  which  all  the  troubles  of  the  time  were  attrib- 
uted to  "an  unchecked  and  uncontrolled  banking  system." 

The  distresses  of  the  day  are  set  forth  as  follows : 

"If  we  turn  to  the  streets  of  our  cities  it  (the  financial 
distress)  is  proclaimed  in  language  not  to  be  mistaken.  If 


HISTORY  OF  BUSINESS  DEPRESSIONS  137 

we  traverse  our  canals  and  railroads  we  find  the  'panic' 
prophecy  fulfilled;  they  are  indeed  a  barren  waste  and 
bear  the  indelible  marks  of  premature  desertion  and  decay." 

That  the  banks  themselves  saw  trouble  ahead  is  evident 
from  articles  by  financial  writers  appearing  in  the  Phila- 
delphia papers  at  the  time,  in  which  great  pains  were  taken 
to  reassure  the  public.  Between  the  lines  can  be  noted 
the  subtle  signs  of  impending  danger.  A  peculiar  incident 
of  the  time  was  noted  when  the  Philadelphia  banks  sus- 
pended specie  payment.  The  New  York  newspapers  criti- 
cised them,  one  remarking  that  it  was  "characteristic  of 
Philadelphia  to  yield  to  a  money  crisis."  Philadelphia 
papers  countered  by  charging  New  York  banks  with  drain- 
ing Philadelphia  of  her  specie  through  various  devices 
which  compelled  the  banks  of  that  city  to  suspend.  Shortly 
after  the  New  York  banks  in  turn  suspended  with  the  single 
exception  of  the  Chemical  Bank. 

After  a  breathing  spell  the  country  looked  back  upon  the 
wreckage  and  took  stock.  No  wonder  a  debacle  resulted 
from  such  a  mess  of  financiering.  The  currency  of  the 
country  consisted  of  a  small  amount  of  gold  and  silver;  a 
large  amount  of  state  chartered  bank  notes,  convertible; 
a  far  larger  amount  of  bank  notes  inconvertible;  notes  of 
private  non-specie  paying  banks;  unauthorized  notes  of 
companies  and  associations,  and  a  conglomeration  of  post 
notes,  deposit  notes,  checks,  states  scrip  and  bills  of  ex- 
change ;  all  circulated  for  money.  Imagine  a  currency  such 
as  this  today.  Who  could  not  see  trouble  ahead?  Some 
historians  say  we  had  two  crises,  one  in  1837  and  the  other 
in  1839.  But  they  were  both  one  and  the  same,  there  being 
a  continual  state  of  crisis  from  1837  through  1839. 

"Banks  were  started  for  the  sole  purpose  of  foisting 
wprthless  notes  upon  a  confiding  public,"  wrote  John  J. 
Knox,  former  Comptroller  of  Currency.  "Losses  from  the 
failures  of  these  'wild-cat'  banks  and  business  concerns 
have  never  been  calculated." 


138  HISTORY  OF  BUSINESS  DEPRESSIONS 

With  the  previous  experience  with  the  national  banks 
and  on  top  of  it  the  experience  with  the  state  banks,  the 
confidence  of  the  public  was  shaken  almost  beyond  re- 
covery. It  is  little  wonder  that  the  people  were  ready  to 
listen  to  the  agitation  against  banks  of  any  kind.  Cleve- 
land says :  "From  the  ruins  of  their  own  fortunes  the  peo- 
ple looked  out  on  bankrupt  cities,  bankrupt  towns,  bank- 
rupt counties,  bankrupt  states." 

In  Europe  not  only  England  was  affected,  but  the  bank  of 
Belgium  suspended  payment.  Numerous  failures  occurred 
in  commercial  circles  of  that  country  and  in  France.  In 
Holland  finances  were  so  burdened  that  it  became  neces- 
sary to  declare  the  colonies  legal  mortgage  for  the  state 
debt. 

With  such  severity  did  this  catastrophe  shake  the  finan- 
cial foundation  of  the  country  that  the  people  almost  lost 
confidence  in  the  Government  itself.  Greater  disorder  and 
chaos  could  not  be  described.  It  was  by  far  the  most  ter- 
rific financial  panic  in  the  history  of  our  country  and  propor- 
tionately more  far  reaching.  It  lasted  fully  three  years,  and 
1840  saw  only  a  start  toward  a  return  to  normal.  It  has  been 
said  we  are  a  people  of  extremes,  that  we  are  either  miserly 
or  extravagant,  and  there  is  good  ground  for  this  assertion, 
as  is  proven  by  our  economic  history.  In  1837  we  reached 
the  lowest  ebb  of  activities  in  our  industrial  life,  yet  coming 
out  of  this  period  we  enjoyed  the  greatest  activity  and  most 
abundant  prosperity  that  we  had  ever  known;  the  rapid 
building  of  railroads,  the  opening  up  of  the  West,  the 
increase  of  immigration,  the  expansion  of  our  agricultural 
output  to  supply  the  ever  increasing  population  of  Europe, 
the  discovery  of  gold  and  lowered  taxation — all  these  fol- 
lowed close  upon  the  heels  of  this  period  of  deepest  de- 
pression. 


CHAPTER  XIII 
THE  DEPRESSION  OF  1847-48 

The  depression  of  this  period  was  short  and  not  so  thor- 
ough and  widespread  in  its  ill-effects.  The  occurrence  is 
seldom  mentioned  in  current  histories  of  our  economic  and 
political  life.  Probably  it  would  have  been  of  greater  con- 
cern had  not  the  discovery  of  gold  in  California  restored 
confidence  and  enthusiasm  in  the  minds  of  the  people.  In 
fact,  the  twenty  year  interval  between  the  crisis  of  1837 
and  that  of  1857,  with  this  short  exception,  witnessed  the 
most  remarkable  industrial  advancement  yet  achieved  in 
the  United  States.  Writers  universally  refer  to  it  as  the 
"Golden  Age"  of  our  history.  The  depression  was  probably 
a  reflection,  to  some  extent,  of  what  was  known  as  the 
"Universal  Revolution"  which  swept  Europe.  It  was  a 
year  of  severe  depression  in  Germany,  causing  an  uprising 
among  the  peasants.  Likewise  in  Austria  the  finances  were 
in  a  precarious  state,  due  to  revolutions  in  Vienna  and 
Hungary.  There  the  export  of  coin  was  forbidden  by  decree 
and  the  forced  circulation  of  paper  notes  was  ordered.  The 
same  year  great  financial  confusion  existed  in  Italy  on  ac- 
count of  the  insurrection  which  broke  out  in  many  parts  of 
the  nation.  France  also  was  involved  in  uprisings  of  the 
people,  as  were  the  various  smaller  nationalities  of  Europe. 

These  developments  found  us  in  a  position  where  capital 
was  so  locked  up  in  internal  improvements  as  to  prove 
largely  useless.  The  year  1847  was  backward ;  the  Mexican 
War  was  on  and  an  air  of  uncertainty  pervaded,  but  condi- 
tions in  this  country  were  fundamentally  sound.  Further- 
more, we  were  helped  by  crop  failures  in  Great  Britain  and 
France.  They  became  so  desperate  that  they  were  driven 
to  pour  their  gold  and  silver  into  the  lap  of  the  United 


140  HISTORY  OF  BUSINESS  DEPRESSIONS 

States  for  the  purchase  of  her  bounteous  harvests.  The  end 
of  the  year  saw  prosperity  returning.  The  depression  ex- 
tended over  the  last  nine  months  of  1847  and  the  first  nine 
months  of  1848,  altogether  a  period  of  a  year  and  a  half. 
Embarrassments  were  slight  and  brief;  discounts,  never- 
theless, fell  from  $344,000,000  to  $332,000,000.  The  store 
of  bullion,  in  spite  of  the  surplus  and  the  favorable  balance 
produced  by  the  export  of  grain  to  Europe,  fell  from  $49,- 
000,000  to  $35,000,000.  Toward  the  end  of  the  year  1848 
the  forward  movement  recommenced. 

The  Mexican  War  ended  favorably  and  immigration  from 
Ireland  on  account  of  the  potato  famine  was  large.  The 
influx  of  these  newcomers  stimulated  activity  and  was  a 
factor  in  ending  one  of  the  shortest  depressions  in  our  his- 
tory. 


CHAPTER  XIV 
THE  DEPRESSION  OF  1857 

A  financial  crisis  in  this  year  burst  into  a  panic.  It  was 
occasioned  by  speculation,  over-expansion  and  injudicious 
bank  credits.  A  violent  depression  followed,  and  while  its 
ravages  were  intense,  yet  the  country  quickly  recovered  and 
the  following  year  returned  almost  to  normal.  The  census 
of  1860  showed  practically  no  traces  of  it.  Some  writers 
claim  that  the  panic  of  this  year  was  the  result  of  reduction 
of  the  tariff,  including  the  placing  of  many  articles  on  the 
free  list.  Others  attribute  other  factors  as  equally  or  more 
important.  It  is  true  that  there  had  been  an  enormous  ad- 
dition to  the  circulating  medium  of  the  country  in  the  form 
of  both  gold  and  bank  notes,  and  speculation  both  in  lands 
and  industrial  enterprises  was  rampant. 

"In  no  other  period  has  this  or  any  other  country  made 
such  remarkable  strides  in  the  accumulation  of  wealth  as 
during  the  Golden  Age.  During  the  period  of  1850  to  1857 
President  Buchanan  calculated  the  production  of  gold  in 
the  United  States  at  $400,000,000,  and  while  this  was  un- 
precedented, had  it  not  proportionately  increased  prices  it 
would  have  served  as  a  stimulant  to  business  unheard  of  in 
history.  The  previous  year,  1856,  3,642  miles  of  railway 
had  been  constructed.  At  that  time  America  had  seven- 
ninths  of  the  railroad  trackage  of  the  world.  Development 
was  far  beyond  the  needs  of  the  time.  People  apparently 
invested  purely  in  their  imagination  of  the  future.  The 
number  of  banks  had  increased  rapidly,  having  practically 
doubled  in  the  ten  years  from  1847  to  1857.  In  1847  the 
number  was  715.  In  1857  there  were  1,416.  The  discounts 
increased  in  like  proportion  and  rose  from  $310,382,945  to 
$684,456,887.  The  circulation  increased  from  $105,519,766 
to  $214,778,822." 


142  HISTORY  OF  BUSINESS  DEPRESSIONS 

In  his  inaugural  address  in  March  of  that  year  President 
Buchanan  said:  "No  nation  has  ever  before  been  embar- 
rassed from  too  large  a  surplus  in  the  Treasury." 

In  1856  reports,  presumably  from  government  sources 
and  published  broadcast,  said  that  "the  year  1856  had  given 
results  of  which  the  past  had  afforded  no  example.  Enor- 
mous advance  had  been  made ;  the  cultivation  of  new  terri- 
tory, the  produce  of  harvests,  the  extension  of  factories,  the 
exploitation  of  mines,  the  exports  and  imports,  the  carrying 
trade,  shipbuilding,  the  railway  returns,  the  spread  and  im- 
provement of  cities." 

Business  firms  in  the  West  began  to  fail  in  the  summer 
when  bills  on  eastern  points  went  to  ten  to  fifteen  per  cent 
premium,  but  eastern  banks  were  the  first  to  succumb, 
probably  because  of  the  drain  on  them  from  the  West. 

The  panic  broke  suddenly  with  the  failure  of  the  Ohio 
Life  Insurance  Company,  whose  home  office  was  in  Cin- 
cinnati, but  having  an  important  branch  in  New  York.  It 
occurred  in  August,  when  business  men  were  away ;  first,  a 
few  small  business  failures,  then  a  large  bank,  and  in  a 
week  trade  of  every  kind  was  demoralized  and  money 
went  to  25  per  cent.  Bankruptcies  among  business  houses 
were  the  rule  rather  than  the  exception.  By  October  the 
panic  had  spread  to  the  entire  country  and  runs  were  being 
made  on  banks  in  every  large  city.  Large  city  banks  refused 
to  receive  the  notes  of  country  banks,  which  not  only  caused 
great  inconvenience,  but  the  value  of  notes  depreciated  and 
business  suffered  through  the  confusion  brought  about. 

The  failure  of  the  Ohio  Life  Insurance  Company  created 
greater  havoc  in  New  York  than  it  did  in  its  home  state, 
although  it  is  said  that  at  one  time  its  failure  threatened 
the  existence  of  the  State  Bank  of  Ohio.  When  the  Gov- 
ernment recalled  its  deposits  from  the  state  banks,  the  only 
one  to  respond  with  payment  in  specie  was  the  State  Bank 
of  Indiana,  which  sent  gold  to  Washington  in  a  stage  coach. 

Warehouses  were  flooded,  with  no  buyers,  and  money 


HISTORY  OF  BUSINESS  DEPRESSIONS  143 

was  up  to  sixty  to  one  hundred  per  cent.  Industry  suffered 
as  badly  as  finance.  Mill  after  mill  closed,  the  strongest 
running  only  part  time.  Factories  that  a  few  months  before 
had  been  running  double  shift  to  fill  the  demand,  closed 
down  entirely  and  prices  fell,  wiping  out  all  profit  and  even 
to  20  per  cent  below  production  cost. 

Great  quantities  of  goods  from  Europe  which  had  been 
purchased  on  credit  and  brought  in  under  the  low  tariff 
were  being  held  for  higher  prices.  Under  such  conditions 
the  panic  was  bound  to  affect  Europe  as  well  as  this  coun- 
try. In  England  houses  connected  with  American  firms 
began  to  fall  one  after  another,  and  soon  panic  was  as  wide- 
spread there  as  in  the  United  States.  Only  the  suspension 
of  the  Bank  Act  of  1844,  on  November  12th,  saved  the 
financial  structure  of  Great  Britain.  An  Englishman 
writing  at  the  time  said :  "The  chief  blame  should  be  laid 
to  the  wild  go-ahead  spirit  of  the  Yankee." 

This  depression  marked  the  turn  in  the  ways  of  com- 
merce of  the  nation,  particularly  in  the  financial  centers. 
The  old  and  conservative  element  had  fallen  in  the  general 
upheaval  and  younger  men  took  hold  of  the  reins  of  busi- 
ness for  the  first  time.  Previous  to  this,  gray  hairs  were 
considered  essential  in  business,  and  no  man  under  fifty 
years  was  considered  sufficiently  experienced  to  handle 
heavy  financial  responsibilities,  but  the  panic  removed  the 
obstructions  to  the  younger  men  who  arose  and  filled  the 
places  of  the  old  conservative  leaders. 

Up  to  this  period  financial  depressions  were  the  signal 
for  new  western  movements.  Steady  streams  of  settlers 
descended  on  the  western  plains  when  hard  times  existed  in 
the  East.  The  history  of  western  migration  shows  that 
wave  after  wave  rolled  out  upon  the  great  plains  as  de- 
pression followed  depression  in  the  cycles  of  trade. 

The  panic  affected  every  section  of  the  country,  the  East 
as  badly  as  the  West.  Thirty-seven  banks  failed  in  the  State 
of  Maine  alone.  It  was  a  great  day  for  "wild-cat"  banks. 


144  HISTORY  OF  BUSINESS  DEPRESSIONS 

State  banking  laws  were  very  loose,  some  throwing  out 
practically  no  safeguards  whatever.  The  story  is  told  that 
in  the  State  of  Michigan  a  bank  commissioner  was  watched 
carefully  so  that  specie  could  be  transported  from  one  bank 
he  had  visited  to  the  one  he  was  next  to  visit.  The  same 
boxes  and  bags  of  gold  and  silver  went  from  bank  to  bank 
where  some  official  was  ready  to  swear  that  the  owner- 
ship was  vested  in  the  present  possessor.  At  times  it  in 
said  the  bags  of  gold  and  silver  passed  the  commissioner 
on  the  road,  sometimes  overtaking  him  at  night  and  again 
"arriving  too  late,  it  was  .handed  in  at  the  back  door  of  the 
banking  house  while  an  examination  was  in  progress.  The 
bank  of  Sandstone,  for  instance,  never  had  any  specie,  and 
although  its  liabilities  exceeded  $38,000,  it  had  no  assets 
of  any  kind  at  the  time  when  it  was  reported  upon.  The 
Exchange  Bank  of  Shiawassee  had  in  its  safe  but  seven 
coppers  and  a  very  small  amount  of  paper,  while  it  had 
bills  in  circulation  to  the  amount  of  $22,267.  The  Jackson 
County  Bank  was  discovered  by  the  commissioners  to  have 
many  large  and  well-filled  boxes,  but  on  being  opened  and 
examined  it  was  found  that  while  the  top  was  covered  with 
silver  dollars  there  was  nothing  below  but  nails  and  glass." 

State  bank  notes  in  circulation  at  the  time  were  indeed 
of  very  flimsy  value.  They  were  not  "legal  tender."  The 
person  to  whom  they  were  offered  in  payment  of  a  debt 
was  not  obliged  to  accept  them.  Had  the  government  real- 
ized that  in  time  these  state  bank  bills  would  do  great  mis- 
chief, these  banks  would  not  have  been  allowed  such  a  privi- 
lege. For  the  time  being,  the  bank  bills  were  convenient, 
and  "the  government  winked  at  the  practice  of  issuing 
them.  If  one  was  obliged  to  take  bills  that  he  knew  nothing 
about,  he  got  rid  of  them  as  soon  as  he  could,  and  in  ac- 
cordance with  the  workings  of  Gresham's  law,  when  a  man 
found  bills  in  circulation  at  a  great  distance  from  the  bank 
of  issue,  he  felt  fairly  sure  that  something  was  wrong,  and 
paid  them  out  promptly.  Such  a  condition  of  things  was 


HISTORY  OF  BUSINESS  DEPRESSIONS  145 

due  largely  to  an  absence  of  any  good  system  of  state  super- 
vision of  banks."  Even  in  the -most  normal  times,  when  no 
immediate  danger  threatened,  such  money  was  bound  to  be 
doubted  by  the  public.  Banks  were  too  often  managed  by 
unscrupulous  men,  who  were  interested  primarily  in  the 
speculative  side  of  banking. 

Bank  management  had  been  conservative  and  wise  in  the 
ten  years,  1843-1853,  notably  in  the  eastern  cities.  Few  new 
banks  were  established,  loans  were  extended  with  caution, 
and  the  issue  of  notes  was  kept  within  reasonable  limits.  The 
$100,000,000  worth  of  gold  sent  to  the  mints  from  Califor- 
nia mines  furnished  a  sufficient  specie  basis  for  bank  cur- 
rency. Credit  agencies  kept  pace  with  the  normal  business 
development  of  the  country.  But  in  1853  a  speculative  mania 
took  possession  of  the  financial  world. 

In  view  of  the  insecure  condition  of  the  banks  of  New 
York  during  the  years  leading  up  to  the  panic,  it  would 
seem  that  almost  anyone  would  have  known  that  something 
was  bound  to  crack.  This  condition  is  shown  by  the  fol- 
lowing table: 

BANKS  OF  NEW  YORK 

Metallic  Discount*       Prop,  of  Met. 

Year  Reserve  Depoiits  Advances         Res.  to  Dep. 

1854  $15,000,000     $  58,000,000     $  80,000,000     26% 

1855  9,900,000          85,000,000        101,000,000     11% 

1856  10,000,000        100,000,000        112,000,000     10% 

1857  7,000,000          99,000,000       122,000,000       7% 

The  collateral  deposited  by  the  banks  represented  $2,- 
500,000  in  1856,  on  which  credit  of  $2,000,000  in  notes  was 
granted.  In  1857  the  same  collateral  did  not  exceed  $560,- 
000,  estimated  value,  on  which  a  credit  of  $383,000  in 
paper  was  granted.  In  his  message  President  Buchanan 
ascribed  the  crisis  to  the  vicious  system  of  the  fiduciary 
circulation,  and  to  the  extravagant  credits  granted  by  the 
banks,  although  he  was  aware  that  Congress  had  no  power 
to  curb  these  excesses. 


146  HISTORY  OF  BUSINESS  DEPRESSIONS 

In  the  Pacific  States,  where  gold  was  used  as  money  and 
was  very  plentiful,  the  panic  of  1857  was  scarcely  felt, 
although  the  San  Francisco  banks  experienced  a  local  panic 
in  1855,  due  to  over-expansion,  during  which  the  well  known 
houses  of  Page,  Bacon  &  Co.,  and  Wells,  Fargo  &  Co.  sus- 
pended temporarily. 

One  feature  of  the  panic  of  1857,  and  the  depression  that 
followed  it,  duplicated  the  experience  of  1837,  and  that  was 
the  almost  universal  prevalence  of  what  were  called  "shin- 
plasters."  They  were  practically  "I.  0.  U's"  given  as  change 
by  anyone  who  had  received  a  bank-note  or  check  for  more 
than  the  amount  due  him  in  payment  for  anything.  In 
New  York  the  notes  of  solvent  New  York  banks  were  never 
refused  in  payment,  while  those  of  banks  elsewhere  were 
tabooed;  but  in  making  change  no  specie  was  given,  the 
banks  having  suspended  specie  payments.  So,  unless  the 
exact  amount  was  tendered,  shinplasters  were  given  for 
the  balance. 

"The  city  was  flooded  with  these  personal  evidences  of 
debt  for  small  amounts,  issued  by  storekeepers,  hotels,  res- 
taurants, saloons,  barbers,  and  the  rest  of  mankind,  and 
many  of  these  were  passed  from  hand  to  hand  till  they  be- 
came too  dirty  and  dilapidated  to  be  handled.  They  were 
the  worst  kind  of  filthy  lucre,  and  understood  to  be  redeem- 
able only  on  a  return  to  cash  payments  by  the  banks.  But, 
of  course,  many  of  them  never  were  redeemed.  They  ranged 
in  amount  from  one  cent  to  several  dollars,  and  this  sort 
of  script  was  more  or  less  extensively  issued  from  Maine 
to  Texas." 

Previous  to  the  outbreak  of  the  panic  a  terrible  strike 
occurred  on  the  Baltimore  &  Ohio  Railroad.  Trains  were 
molested  and  many  fights  occurred.  The  militia  was  called 
out  and  a  desperate  battle  ensued,  in  which  many  were 
killed  and  wounded.  Men  were  warned  in  newspapers  to 
keep  out  of  New  York  City  for  the  winter,  to  stay  where 


HISTORY  OF  BUSINESS  DEPRESSIONS  147 

they  were  known  and  struggle  through  as  all  work  shops 
were  closed  or  over-supplied  with  hands. 

In  those  days  there  were  a  number  of  publications  which 
apparently  prospered  by  publishing  lists  of  counterfeit, 
altered  and  spurious  bank  notes.  Apparently,  all  kinds  of 
illegal  notes  were  in  circulation,  including  money  on  imagi- 
nary banks,  and  the  public  no  doubt  had  to  beware  of  what 
paper  money  it  accepted.  In  the  year  1858  Nichols*  Bank 
Note  Reporter  carried  5,400  separate  descriptions  of  false 
money.  Other  publications  of  this  time  were  Thompson's 
Reporter  and  Monroe's  Descriptive  List  of  Genuine  Bank 
Notes. 

That  year  witnessed  an  inexplicable  manifestation  of  re- 
ligious revival  in  New  York.  A  Dutch  Reformed  minister, 
Rev.  Lamphire,  conceived  the  idea  that  an  hour  of  prayer 
would  bring  consolation  to  afflicted  business  men.  He  was 
astonished  at  the  results.  Several  churches  in  the  financial 
district  were  opened  and  finally  a  theatre  was  hired,  and 
for  some  months  all  of  these  were  crowded  to  their  capacity 
by  business  men  who  sought  consolation  for  their  loss.  Even 
the  firemen  and  policemen  held  their  prayer-meetings. 

While  admittedly  the  depression  was  due  to  underlying 
causes,  such  as  speculation  and  over-expansion  of  credit, 
together  with  the  unprecedented  high  prices  occasioned  by 
the  enormous  output  of  gold  from  California  and  Australia, 
it  is  generally  accepted  that  a  single  incident  pricked  the 
bubble,  as  usual.  The  story  goes  that  the  Ohio  Life  Insur- 
ance Company  had  $5,000,000  tied  up  in  railroad  loans  and 
their  New  York  agent  defaulted,  causing  the  failure  of  the 
company  with  large  liabilities.  One  institution  after  an- 
other followed  suit,  as  did  many  of  the  eastern  railroads. 
In  1857  there  were  almost  5,000  failures. 


CHAPTER  XV 
THE  DEPRESSION  OF  1860-61 

The  country  had  made  rapid  recovery  from  the  panic 
of  1857  and  business  had  recovered  its  stride.  Grain  crops 
were  good,  cotton  production  unparalleled,  and  diminished 
imports  had  brought  considerable  gold  into  the  country. 
When  the  attitude  of  the  South  began  to  be  taken  seriously, 
northern  creditors  curtailed  their  business  with  southern 
debtors  and  a  period  of  expectancy  was  abroad  in  the  land. 
The  economic  status  of  the  country  at  the  time  was  de- 
scribed thus: 

"The  cotton  crop  in  I860  reached  4,675,770  bales,  nearly 
a  million  bales  more  than  in  any  previous  year,  great  gains 
had  been  made  in  the  crops  of  wheat,  corn,  and  other  ce- 
reals ;  the  production  of  anthracite  coal  in  Pennsylvania  was 
nearly  800,000  tons  greater  than  in  any  preceding  year; 
the  output  of  pig  iron  was  913,000  tons,  or  130,000  more 
than  the  average  of  the  six  preceding  years;  exports,  in- 
cluding the  precious  metals,  had  reached  the  highest  point 
then  known,  $400,000,000  (of  which  $316,000,000  was  do- 
mestic merchandise) ,  or  $43,000,000  more  than  in  any  other 
previous  year.  The  consuming  powers  of  the  people  had 
never  been  so  high,  as  was  proved  in  particular  by  the  un- 
precedented demand  for  sugar  and  tea ;  there  was  but  little 
pauperism,  and  wealth  on  the  whole  was  evenly  distributed ; 
179,000  immigrants  landed  in  1860,  or  58,000  in  excess  of 
the  preceding  year.  The  tonnage  of  American  shipping 
was  greater  than  ever  before  or  since,  and  two-thirds  of 
our  imports  and  exports  were  carried  in  vessels  having  an 
American  register." 

Toward  the  end  of  1860  business  began  to  feel  the  de- 
pression keenly  on  account  of  the  uncertainty  attending 
the  presidential  election.  The  country  was  torn  by  the 
slavery  question  and  the  South  threatened  rebellion.  Prob- 
ably the  election  of  that  year  had  greater  effect  on  business 


HISTORY  OF   BUSINESS   DEPRESSIONS  149 

than  any  other  election  in  our  history.  When  the  election 
of  Lincoln  was  announced  business  stood  breathlessly 
awaiting  developments.  The  southern  banks  suspended 
specie  payments  on  December  12,  1860.  While  conditions 
in  the  North  were  bad,  they  were  probably  worse  in  the 
South. 

It  was  in  this  crisis  that  the  plan  of  combining  reserves 
was  first  put  into  effect.  The  secession  movement  had 
become  so  alarming  that  industry  was  paralyzed,  and  the 
fifty  banks  of  New  York  set  about  te  save  themselves  from 
the  impending  disaster.  It  was  necessary  to  satisfy  de- 
positors of  the  solvency  of  the  banks  so  as  to  prevent  with- 
drawals and  hoarding  of  specie,  thus  bringing  suspension 
of  the  banks  themselves.  Credit  had  been  expanded  in 
order  to  relieve  the  depression  of  1857  and  reserves  were 
low,  but  leaders  felt  that  they  were  sufficient  to  tide  over 
the  crisis  if  they  were  all  pooled.  It  was  very  difficult  at 
the  time  to  secure  concert  of  action  because  the  banks  were 
more  or  less  jealous  and  suspicious  of  each  other.  Necessity 
forced  the  issue  and  finally,  on  November  21,  1860,  clear- 
ing house  certificates  were  issued  for  the  first  time,  amount- 
ing to  $10,000,000  all  to  be  redeemed  by  February  1,  1861. 
All  the  banks  entered  the  agreement  except  the  Chemical 
Bank,  which  was  noted  for  years  as  one  of  small  capital  and 
remarkably  large  deposits.  This  institution  felt  secure 
by  itself  and  proved  to  be  so.  The  arrangement  met  with 
good  response  by  the  public,  and  the  anticipated  panic 
passed  over  with  only  an  inconsiderable  loss  in  specie.  The 
Boston  banks  considered  the  same  plan  but  failed  to  put  it 
into  effect,  although  their  banks  eventually  weathered  the 
storm  with  the  help  of  New  York  institutions.  Business 
depression,  however,  continued  until  after  the  outbreak  of 
the  Civil  War.  When  South  Carolina  seceded  December  20, 
1860,  wild  confusion  ensued,  in  spite  of  the  general  belief 
that  the  trouble  would  be  of  short  duration. 

Bankers  and  financiers  the  country  over  perceived  the 


150  HISTORY  OF  BUSINESS  DEPRESSIONS 

gravity  of  the  situation.  They  feared  that  the  nation's 
trade  would  collapse  and  the  whole  framework  of  our 
political  and  financial  system  would  be  in  danger.  "Not 
only  was  the  domestic  situation  dismal,  but  sombre 
clouds  floated  over  from  Europe,  where  unfriendly  nations 
were  awaiting  a  favorable  opportunity  to  cut  up  the  Ameri- 
can Continent  as  it  had  been  a  hundred  years  before."  Under 
these  circumstances  it  is  manifest  that  the  economic  situa- 
tion was  extremely  dark  and  business  practically  paralyzed. 
At  the  announcement  of  the  bombardment  of  Fort  Sumter 
business  came  to  a  standstill;  stocks  went  down  to  almost 
nothing ;  money  was  unobtainable ;  and  distrust  everywhere 
prevailed. 

The  general  opinion  was  that  there  would  be  more  eco- 
nomic trouble  than  political  trouble.  Nobody  thought  there 
would  be  a  prolonged  war.  Secretary  Seward  predicted 
that  it  would  be  over  in  three  months,  but  economic  troubles 
were  comparatively  short-lived  and  political  troubles  pro- 
longed. On  December  30,  1861,  following  the  initial  fight- 
ing, gold  was  demonetized  and  later  brought  a  premium  as 
high  as  285  per  cent  over  United  States  legal  tender  notes. 
An  issue  of  $20,000,000  of  United  States  5  per  cent  bonds 
brought  subscriptions  for  only  one-fourth  of  the  amount, 
and  some  of  this  was  never  paid  for  in  full,  owing  to  the 
severely  depressed  times. 

Lincoln  certainly  faced  extraordinary  difficulties.  Com- 
ing into  office  under  stressful  and  threatening  times,  he 
was  faced  with  an  empty  treasury.  Interest  payments  on 
the  public  debt  were  about  to  fall  due  and  there  was  no 
money  in  the  vaults  even  for  this.  The  Secretary  of  the 
Treasury  under  Buchanan,  Howell  Cobb,  resigned  with 
surprising  suddenness  and  left  for  the  South,  leaving  his 
department  in  a  deplorable  condition.  So  depleted  was 
the  treasury  after  Lincoln's  election  that  the  warrants  on 
the  treasury  for  the  pay  of  members  of  Congress  were 
turned  down  for  want  of  funds.  John  Sherman,  chairman 


HISTORY  OF  BUSINESS   DEPRESSIONS  151 

of  the  Ways  and  Means  Committee,  speaking  in  the  House 
of  Representatives  on  December  10,  1860,  said:  "Most  of 
the  members  are  aware  that  the  government  has  not  been 
able  to  pay  for  the  last  week  or  two  our  own  salaries  and 
many  other  demands  at  New  York  and  other  places." 

The  depression  was  felt  very  severely  in  the  West.  The 
securities  of  the  Illinois  banks  consisted  of  southern  paper 
to  the  extent  of  60  per  cent,  and  when  the  war  threatened 
frantic  attempts  were  made  to  turn  these  securities  into 
money.  But  the  South  was  not  in  a  hurry  to  pay  and  the 
Illinois  banks  began  to  be  undermined.  The  Legislature  of 
that  year  took  cognizance  of  the  situation  and  passed  a  law 
requiring  that  all  future  securities  of  the  banks  of  that 
State  should  consist  of  United  States  or  Illinois  stocks  and 
bonds.  Large  amounts  of  southern  state  bonds  had  been 
pledged  by  various  northern  banks  to  secure  their  circula- 
tion. This  shrinkage  in  the  value  of  the  security  for  the 
notes  caused  further  apprehension  and  it  was  apparent  that 
a  large  portion  of  the  northern  banks  would  fail  unless  they 
were  given  time  to  gradually  replace  these  securities  with 
ethers.  In  consideration  of  the  stress  of  the  times,  the 
various  State  Legislatures  permitted  this.  In  Wisconsin 
it  was  said  that  at  least  three-fourths  of  all  the  banks  would 
have  failed  had  the  immediate  demand  been  made  to  replace 
these  securities. 

In  1861  the  South  proceeded  to  repudiate  its  obligations 
to  the  North.  A  great  deal  of  the  money  was  owed  in  New 
England  and  deposits  fell  in  Boston  from  $20,811,889  to 
$17,176,778  in  two  months,  and  specie  reserves  fell  to  $3,- 
491,348,  far  below  the  limit  required  by  law.  The  whole 
amount  of  southern  indebtedness  to  the  North  was  esti- 
mated by  intelligent  merchants  in  New  York  and  Boston 
at  $2,000,000,000  and  a  large  part  of  it  was  lost  by  the 
breaking  out  of  war.  The  disaster  of  1857,  which  spread 
to  England,  had  affected  the  confidence  of  the  whole  world 
in  American  securities,  and  we  soon  realized  that  we  could 


152  HISTORY   OF   BUSINESS   DEPRESSIONS 

not  look  to  England  for  financial  help  in  case  of  protracted 
war.  It  was  apparent  that  this  country  would  have  to  do 
its  own  financing.  This  suspicion  was  borne  out  when  the 
United  States  War  Bonds  met  a  cold  reception  in  England. 
The  Government  discouraged  the  circulation  of  specie,  re- 
questing all  banks  to  keep  it  in  their  vaults,  and  issued  legal 
tender  notes  which  were  to  be  taken  for  all  debts,  public 
or  private.  These  notes  circulated  freely,  as  it  was  con- 
sidered an  unpatriotic  act  to  refuse  them,  and  they  soon 
became  plentiful  under  stress  of  war.  Failures  in  1861 
amounted  to  6,993  in  number,  with  liabilities  of  $207,210,- 
000.  Wages  continued  high,  while  only  89,724  immigrants 
came  into  the  country. 

Conant  says:  "The  legal  tender  notes,  which  followed 
quickly  on  the  heels  of  the  demand  notes,  changed  the  stand- 
ard of  value  in  the  United  States,  drove  gold  across  the 
ocean  or  into  private  hoards,  deprived  us  of  foreign  help  and 
sympathy,  advanced  prices  from  100  to  200  per  cent,  and 
added  enormously  to  the  profits  of  speculators  and  to  the 
costs  of  the  war  to  the  people  of  the  country.  The  price  of 
gold  advanced  steadily  from  the  suspension  of  specie  pay- 
ments until  the  summer  of  1864,  when  it  touched  285.  The 
wholesale  prices  of  nearly  all  articles  climbed  upward  with 
the  gold  premium  and  retail  prices  in  many  cases  advanced 
still  more,  increasing  the  paper  cost  of  every  contract  for 
carrying  on  the  war." 


CHAPTER  XVI 
THE  DEPRESSION  OF  1868-69. 

Following  the  peace  in  1865,  the  North  settled  down  into 
a  period  of  contentment,  breathing  a  sigh  of  relief  that  not 
only  the  bloodshed  and  carnage  was  over,  but  that  the  Union 
had  been  saved.  There  was  a  feeling  of  security  in  the 
North,  and  while  no  excessive  prosperity  was  enjoyed 
fairly  normal  conditions  prevailed  until  the  latter  part  of 
1868.  This,  however,  included  only  the  North,  where  the 
soldiers  were  given  receptions  of  welcome  home  and  where 
money  put  into  circulation  during  the  war  was  still  plenti- 
ful. In  the  South,  however,  the  worst  form  of  depression 
existed.  The  victorious  North  made  it  one  of  the  conditions 
of  the  surrender  that  the  debts  of  the  Southern  States  which 
had  been  contracted  for  the  purpose  of  aiding  the  rebellion 
should  not  be  assumed  by  the  nation.  As  a  consequence  of 
the  repudiation  of  these  debts  and  the  deplorable  conditions 
resulting  from  defeat,  the  South  was  stricken  with  poverty. 

Its  only  immediate  resource  was  a  surplus  of  cotton,  but 
this  had  passed  from  the  hands  of  the  producers  to  interests, 
mostly  foreign,  which  had  it  stored  in  the  ports  awaiting 
the  end  of  the  war.  In  the  twelve  months  following  the 
close  of  the  war  the  exports  of  cotton,  though  less  than  half 
the  quantity  of  the  years  immediately  preceding  the  war, 
reached  the  unprecedented  money  value  of  $200,000,000. 
Could  this  money  have  been  distributed  to  the  planters 
throughout  the  South  that  year  great  suffering  could  have 
been  alleviated. 

The  collapse  did  not  follow  immediately  after  the  Civil 
War  because  of  two  chief  reasons:  first,  the  fact  that  the 
customary  payment  for  military  debauch  was  not  exacted 
immediately  but  deferred  for  almost  a  decade;  and  the 
other  was  because  of  the  high  protection  that  had  been 


154  HISTORY  OF  BUSINESS  DEPRESSIONS 

given  our  industries  during  the  war  and  which  was  re- 
tained, preventing  an  influx  of  foreign  goods  with  the  com- 
ing of  peace  and  maintaining  a  price  level  in  keeping  with 
that  of  the  war  period. 

One  cause  of  the  depression  of  this  year  was  from  the 
policy  of  retiring  a  certain  amount  of  the  greenbacks  which 
had  been  placed  in  circulation  during  the  war.  The  total 
amount  had  been  reduced  to  $356,000,000,  when  the  con- 
traction was  felt  to  such  an  extent  that  the  public  clamor 
became  general  against  it.  On  February  4th,  1868,  Con- 
gress by  law  stopped  the  further  retirement  of  this  currency 
and  even  attempted  to  authorize  the  issue  of  greater 
amounts,  a  bill  providing  for  same  being  vetoed  by  Presi- 
dent Grant. 

The  woolen  goods  trade  was  the  first  to  feel  the  depres- 
sion which  started  with  that  industry  the  latter  part  of 
1867,  as  indicated  by  decreased  demand,  no  doubt  due  to 
the  extremely  high  prices  prevailing. 

For  several  years  previous  to  the  crash  of  1869  there  had 
been  a  stringency  in  the  fall  of  the  year  when  crops  were 
moving.  On  investigation  it  was  found  that  the  practice  of 
certifying  checks  and  the  use  of  national  bank  capital 
and  credit  in  New  York  stock  speculation  was  the  root  of 
the  trouble.  It  was  estimated  that  $70,000,000  of  capital 
and  $112,000,000  of  credit  were  used  in  this  way.  The 
Comptroller,  in  1868,  referred  to  this  condition  and  sug- 
gested a  remedy  lest  the  stringency  become  so  acute  that 
panic  would  result.  No  steps  were  taken,  and  the  very  next 
year  the  situation  culminated  in  "Black  Friday."  The 
American  dollar  had  depreciated  in  value  14  per  cent  from 
the  time  of  the  surrender  of  Lee,  April,  1865,  until  the  col- 
lapse of  "Black  Friday,"  and  gold  was  bringing  a  heavy 
premium.  It  was  then  that  Jay  Gould,  with  his  associates, 
conceived  a  scheme  to  corner  the  country'  supply  through 
manipulation  of  the  market.  They  proceeded  to  buy  up  all 
the  gold  possible,  the  one  influence  feared  being  the  Govern- 


HISTORY   OF  BUSINESS   DEPRESSIONS  155 

ment,  which  had  in  its  treasury  about  $100,000,000  in  gold. 
Gould  had  formed  a  friendship  with  A.  R.  Corbin,  of  New 
York,  who  had  married  a  sister  of  President  Grant,  who  f  re- 
quently  visited  Corbin's  home  and  in  this  way  became  ac- 
quainted with  Gould. 

General  Grant  was  not  a  good  judge  of  character,  but  if 
he  liked  a  man  he  trusted  him  entirely,  and  would  believe 
nothing  evil  of  him.  In  these  private  conversations  with 
Grant,  Gould  made  a  good  impression ;  he  talked  a  great  deal 
about  the  necessity  of  prosperity  at  such  a  time  and  how  im- 
portant the  prosperity  of  the  farming  class  was.  He  tried 
then  to  show  that  all  this  depended  on  maintaining  the  high 
price  of  gold,  or  even  on  raising  it  higher.  The  point  of  all 
this,  of  course,  was  to  prevent  the  Government  from  paying 
out  gold,  and  thus  spoiling  Gould's  plans. 

Grant  let  things  run  along  without  committing  himself. 
Meanwhile  Gould  was  buying  up  all  the  gold  that  he  could, 
but  he  had  to  purchase  enormous  amounts  before  he  dared 
to  advance  the  price.  In  the  early  part  of  September,  1869, 
gold  stood  at  132.  Gould's  agents  had  managed  affairs  so 
well  that  they  had  ensnared  certain  government  officials 
and  had  induced  them  to  speculate  in  the  gold  market. 
Then  came  the  famous  "Black  Friday"  which  brought  on  the 
panic  of  1869.  Scores  of  writers  have  drawn  vivid  word 
pictures  of  this  famous  financial  tragedy.  A  typical  and 
well  written  story  is  that  by  Moore : 

"By  the  middle  of  the  month  it  became  known  that  Gould 
and  Fiske  were  trying  to  corner  gold  coin.  And  then  the 
scramble  began.  Legitimate  business  was  lost  sight  of  in 
the  mad  speculation  that  came  to  its  climax  on  Friday,  Sep- 
tember 24,  'Black  Friday,'  the  most  disastrous  day  our 
business  world  had  yet  seen.  On  September  20th  gold  had 
risen  to  a  fraction  over  137,  and  with  this  rise  the  specula- 
tors made  a  false  step.  The  tremendous  burden  that  they 
were  carrying  had  made  them  nervous;  they  had  bought 
millions  in  gold,  which  was  safe  enough  if  they  could  sell 
it  for  more  than  they  had  paid  for  it,  but  if  the  market  broke 
and  they  had  to  sell  for  less  than  they  paid  their  losses 


156  HISTORY  OF  BUSINESS  DEPRESSIONS 

would  be  enormous.  Many  of  their  sales  were  for  future 
delivery,  and  if  they  should  be  forced  to  meet  these  demands 
they  would  be  ruined.  The  greater  their  purchases,  the 
greater  the  risk  they  ran,  and  even  Gould,  accustomed  as 
he  was  to  speculating,  became  frightened.  He  got  Corbin 
to  write  to  Grant,  urging  on  him  the  supreme  importance 
of  keeping  the  Government's  gold  supply  intact.  Though 
Grant  did  not  understand  this  letter  (received  September 
19th)  he  was  sure  that  something  was  wrong,  and  he  did  not 
want  to  be  involved  in  any  sort  of  financial  crookedness.  So 
he  had  Mrs.  Grant  write  to  Mrs.  Corbin,  telling  her  that  it 
was  imperative  that  Corbin  should  get  out  of  the  gold  mar- 
ket and  sever  all  relations  with  the  Gould  interests. 
Although  this  cost  Corbin  a  pretty  penny,  he  was  so  im- 
pressed with  the  gravity  of  the  situation  that  he  did  cut  loose 
entirely  from  speculation  in  gold  (September  23).  Gould 
took  warning  at  this,  and  continued  quietly  to  sell  all  that  he 
could.  Fiske,  however,  plunged  even  more  recklessly.  When 
the  close  of  business  came  on  Thursday  gold  had  risen  to 
144.  Thursday  night  and  early  Friday  morning  the  excite- 
ment became  intense.  Tremendous  pressure  was  brought 
to  bear  on  the  Secretary  of  the  Treasury  from  all  quarters, 
urging  him  to  pay  out  gold  to  save  the  business  world  from 
ruin.  The  speculators  calculated  that  business  men  must 
buy  gold,  no  matter  what  it  cost  them,  because  they  could  do 
business  only  with  gold.  When  the  price  went  so  high  that 
they  could  not  buy  it,  then  they  must  fail.  With  the  price  at 
144  and  still  rising,  thousands  of  men  were  near  to  bank- 
ruptcy. Yet,  without  the  sanction  of  the  President,  the 
Secretary  of  the  Treasury  could  not  change  the  policy  of  the 
Government  and  pay  out  gold.  When  the  market  opened  on 
Friday,  September  24th,Fiske's  party  assumed  control.  They 
rushed  the  price  up  to  150  almost  at  once.  The  uproar  was 
frightful.  Increase  a  thousand  times  the  excitement  of  a 
pennant  baseball  game,  shut  it  up  in  a  small  hall,  and  you 
may  imagine  the  scene  of  Friday  morning.  By  noon  the  price 
had  risen  to  160,  and  a  few  moments  after  12  it  reached 
162.  Just  then  came  word  that  after  a  long  consultation 
Grant  and  his  secretary  had  determined  to  relieve  the  sit- 
uation by  selling  gold,  the  amount  of  the  first  day's  sales 
to  be  $4,000,000.  This  indication  of  a  change  in  policy  by 
the  Government  brought  people  to  their  senses,  and  the 
price  of  gold  dropped  almost  at  once  from  162  to  135,  only  a 


HISTORY  OF  BUSINESS  DEPRESSIONS  157 

little  higher  than  it  had  been  two  months  before.  The  reac- 
tion was  terrible;  the  blind  rage  of  mob  violence  seized 
the  throng  .of  brokers  and  onlookers,  and  Gould  and  Fiske, 
who  were  known  to  be  operators  of  the  scheme,  had  to  hide 
for  their  lives. 

"The  results  of  Black  Friday  were  two;  one  moral,  the 
other  financial.  Such  a  time  presents  peculiar  temptations  t* 
get  rich  and  to  cover  up  financial  sins ;  the  great  number  of 
dishonest  transactions  at  that  time  shows  the  disastrous 
effects  of  such  occurrences  on  public  morals.  The  financial 
effect  of  this  day's  work  was  the  great  number  of  business 
failures  that  resulted.  The  whole  business  life  of  the  coun- 
try had  been  at  a  standstill  while  the  last  scenes  of  the 
conspiracy  were  being  enacted.  This  in  itself  represented 
a  great  loss ;  moreover,  these  merchants  were  obliged  to  get 
gold  or  else  suspend  business.  It  was  not  a  question  of  a  large 
or  a  small  sum;  every  man  who  owed  money  was  in  an 
equally  difficult  situation.  If  no  gold  could  be  had,  failures 
must  follow  in  many  cases.  Friday  morning,  when  the  price 
was  up  at  160,  the  failures  were  to  be  counted  by  thousands, 
and  even  after  the  day  was  over  bankruptcies  continued.  So 
involved  are  the  relations  of  the  business  world  that  one 
bad  failure  often  carries  others  with  it,  even  in  good  times ; 
but  when  panic  is  in  the  air,  the  result  is  doubly  disastrous." 

A  humorous  story  is  told  of  an  Israelite  who  traded  on 
Wall  Street  and  who  had  a  large  supply  of  the  precious 
metal.  When  he  learned  of  the  break  in  gold  from  160  to 
140  he  fainted,  and  after  first-aid  had  been  administered 
for  several  minutes  he  recovered.  As  soon  as  he  opened  his 
eyes  he  asked,  "What  ish  the  prizh  now?"  When  told  that 
it  had  gone  still  lower  he  fainted  again,  and  before  the  deb- 
acle was  over  he  was  ruined. 

The  Garfield  Committe  in  Congress  later  investigated  the 
whole  transaction.  Little  came  of  it,  but  a  part  of  the  re- 
port read :  "The  wicked  and  cunningly  devised  attempt  of 
the  conspirators  to  compromise  the  President  of  the  United 
States  or  his  family  utterly  failed."  When  the  conspiracy 
was  discovered  eye  witnesses  say  that  a  riotous  crowd  gath- 
ered outside  of  the  office  of  Jay  Gould  bent  upon  lynching 


158  HISTORY  OF  BUSINESS  DEPRESSIONS 

that  gentleman,  but  their  bird  had  flown  by  a  rear  passage. 
Gould  was  later  arrested. 

Hundreds  of  firms  engaged  in  business  and  industry 
were  wholly  ruined  or  seriously  crippled.  Importers  of 
foreign  goods  were  for  many  days  at  the  mercy  of  gamblers 
and  suffered  heavy  losses.  For  weeks  the  business  of  the 
entire  country  was  at  a  standstill ;  a  vast  volume  of  money 
was  drawn  from  the  channels  of  trade  and  held  in  the  grasp 
of  the  conspirators.  The  foundations  of  business  morality 
were  rudely  shaken,  and  the  numerous  defalcations  that  fol- 
lowed are  clearly  traceable  to  the  wild  spirit  engendered  by 
speculation. 

The  scandals  of  the  Erie  Railroad  first  came  to  light  this 
year.  The  Erie  stock  was  in  its  day  much  sought  after. 
The  numerous  pools  organized  between  London  and  New 
York  fought  for  control,  and  the  memorable  contest  be- 
tween the  directors  of  the  Erie  Railroad  waged  between 
Commodore  Vanderbilt  on  the  one  side  and  Gould,  Fiske 
and  Drew  on  the  other,  was  one  of  the  disgraceful  occur- 
rences of  the  period.  Vanderbilt,  in  his  attempt  to  corner 
the  stock  of  the  Erie,  spent  nearly  $16,000,000  in  buying 
stock,  which  his  opponents  were  issuing  fraudulently.  The 
Wall  Street  fight  was  carried  to  the  courts,  and  here  injunc- 
tions and  counter-injunctions  resulted  in  no  definite  action. 
The  matter  was  then  transferred  to  the  Legislature,  where 
the  outcome  apparently  depended  solely  upon  which  side 
would  pay  the  most  money  for  the  votes  of  the  legislators. 

Since  the  outbreak  of  the  war  the  country  had  revolu- 
tionized its  methods  of  government  and  business.  Truly 
the  Civil  War  marked  the  greatest  epoch  in  our  history,  not 
only  political,  but  economic:  a  new  monetary  system  had 
been  created,  the  policy  of  extreme  protection  to  our  indus- 
tries inaugurated,  and  for  the  first  time  in  our  history 
the  system  of  direct  taxation.  All  of  this  had  its  effect  on 
business,  although  the  statesmen  of  the  time  carefully  safe- 
guarded the  interests  of  business  whenever  possible. 


HISTORY  OF  BUSINESS   DEPRESSIONS  159 

Failures  numbered  2,799,  with  liabilities  increased  to 
$75,054,000.  The  number  of  immigrants  increased  to 
352,768.  In  1868  fourteen  national  banks  had  failed  and 
been  placed  in  the  hands  of  receivers,  and  a  number  had 
gone  into  voluntary  liquidation.  The  business  of  the  coun- 
try slowed  up  only  temporarily,  and  was  soon  going  ahead 
by  leaps  and  bounds,  only  to  be  retarded  by  the  shock  of 
1873. 


CHAPTER  XVII 
THE  DEPRESSION  OF  1873-75. 

Speculation  with  all  its  attending  evils  was  the  primary 
cause  of  the  depression  of  1873.  Every  line  of  industry  had 
been  stimulated  beyond  its  needs  in  anticipation  of  still 
greater  profits.  Borrowers  went  heavily  into  debt,  paying 
high  rates  of  interest,  to  develop  new  industrial  enterprises 
with  the  inevitable  consequences  of  over-production.  The 
depression  was  marked  by  failures  and  bankruptcy  of  many 
banks  and  business  houses  all  over  the  country.  It  lasted 
for  three  years.  This  was  a  world-wide  depression.  It 
began  in  Vienna  in  May,  1873,  spreading  through  Europe, 
particularly  to  London,  and  then  to  the  United  States.  It 
affected  Austria-Hungary,  England,  Germany,  Italy,  Rus- 
sia and  South  America.  This  country  was  quickly  affected 
by  conditions  in  Europe  because  we  were  unable  to  market 
further  securities  in  the  Old  World,  principally  railroad 
stocks  and  bonds. 

The  country  had  incurred  a  heavy  foreign  indebtedness, 
having  during  the  years  1861  to  1868  borrowed  abroad  on 
her  national,  state,  railway  and  other  securities,  an  amount 
estimated  at  $1,500,000,000.  In  consequence  of  this  credit 
we  incurred  an  annual  interest  charge  estimated  in  1868 
at  $80,000,000.  In  addition,  payments  made  by  American 
travelers  abroad  and  for  freights  in  foreign  vessels  brought 
the  total  annual  tribute,  not  counting  payment  for  ordinary 
imports,  up  to  $129,000,000. 

The  panic  started  on  September  13th,  when  a  rubber 
house  failed  in  New  York.  This  was  followed  a  couple  of 
days  later  by  two  large  banks,  and  by  the  20th  excitement 
was  intense  and  runs  were  made  on  several  other  banks. 
The  Stock  Exchange  closed  its  doors  for  ten  days,  while 


HISTORY  OF  BUSINESS  DEPRESSIONS  161 

the  clearing-house  issued  certificates,  thus  enabling  the 
banks  to  retain  the  specie  in  their  vaults.  Payment  in  gold 
and  silver  was  partially  stopped  by  all  banks  in  New  York. 
Manufacturing,  agriculture,  transportation  and  banking 
lay  helpless  in  the  path  of  the  storm.  Railroad  building  had 
come  too  fast  to  be  healthy,  and  such  failures  as  the  Erie 
and  the  Credit  Mobilier  hastened  further  demoralization. 
A  number  of  Congressmen  were  given  stock  in  the  Credit 
Mobilier  for  their  influence  in  legislative  matters,  and  two 
members  were  later  expelled  from  the  House  for  bribery  in 
connection  with  this  company.  Others  were  censured  and 
an  effort  was  made  to  impeach  Vice-President  Colfax.  The 
import  duties  of  1872  had  been  so  lowered  that  foreign 
competition  was  sufficient  to  capsize  the  already  overloaded 
enterprises  which  were  unable  to  market  their  stocks  at 
anything  but  a  ruinous  price,  with  the  result  that  thousands 
of  business  firms  failed  to  meet  their  obligations  and  went 
into  bankruptcy.  The  banks  were  slow  in  taking  concerted 
action,  but  even  had  they  done  so  with  greater  promptness 
it  is  a  question  whether  the  panic  would  have  been  averted. 
Deposits  in  the  national  banks  fell  from  $641,121,775  on 
June  13,  1873,  to  $540,510,602  on  December  26. 

At  the  height  of  the  panic  money  could  not  be  had  at  any 
price ;  some  few  loans  were  made  at  1^  per  cent  per  day. 
The  banks  passed  the  most  critical  period  by  October  14th. 
Out  of  32,278,000  legal-tender  dollars  at  the  beginning 
of  the  panic,  only  $5,800,000  remained  on  hand.  Accord- 
ing to  the  statement  of  the  Comptroller  of  the  Currency, 
"paper  discounted  decreased  between  the  12th  of  September 
and  the  first  of  November  from  $199,000,000  to  $169,- 
000,000." 

An  incident  of  interest  might  be  mentioned  here  in  that  it 
was  the  first  time  the  expression  "frenzied  finance"  was 
used,  a  phrase  that  we  read  a  great  deal  about  in  later  years. 
This  period  brought  forward  a  new  type  of  American  busi- 
ness man.  The  sober,  conservative  worker  of  the  ante- 


162  HISTORY  OF   BUSINESS  DEPRESSIONS 

bellum  period  was  replaced  by  men  who  delighted  in  taking 
big  risks,  many  times  blazing  across  the  financial  skies  like  a 
comet,  often  making  a  fortune  in  a  single  night.  If  they 
made  good  they  were  lauded  and  praised,  and  if  they  failed 
it  was  little  trouble  to  escape  jail.  That  figure  has  been  with 
us  for  some  years,  but  it  is  probably  now  passing  in  favor  of 
the  type  that  is  called  aggressively  conservative. 

Railroad  construction  had  gone  ahead  beyond  reason. 
Five  years  preceding  the  depression  32,000  miles  of  rail- 
roads had  been  built,  involving  the  sum  of  over  $2,000,- 
000,000.  Large  sums  of  this  money  could  not  possibly 
bring  an  immediate  return  and  scores  of  the  new  railroads, 
unable  to  meet  the  interest  on  their  bonded  debt,  were 
forced  into  bankruptcy.  Among  the  important  houses  to 
suspend  was  Sprague,  Claflin  &  Co. 

The  previous  year  was  a  presidential  election  year,  and 
the  notorious  Tweed  Ring,  bent  on  electing  Horace  Greeley 
over  General  Grant,  arranged  that  a  panic  should  take  place 
simultaneously  with  the  State  election  in  Pennsylvania,  so 
as  to  illustrate  the  evil  results  of  Republican  rule,  and  turn 
the  influence  in  favor  of  Mr.  Greeley 's  election.  The  plot 
was  discovered  and  the  news  sent  to  Washington.  When 
the  Secretary  of  the  Treasury  was  convinced  of  the  cor- 
rectness of  the  move  he  arranged  to  purchase  $10,000,000 
of  bonds  and  the  sale  of  $10,000,000  of  gold  for  the  pur- 
pose of  thwarting  the  Tweed  conspiracy.  The  sum  of 
$20,000,000  was  deposited  in  New  York  banks  and  placed 
in  circulation,  promptly  defeating  the  machinations  of  the 
Ring,  but  it  afterward  proved  that  this  only  postponed  the 
hour  of  reckoning  until  the  following  year. 

Many  writers  insist  that  the  crisis  of  1873  was  a  rebound 
from  the  Civil  War.  We  escaped  the  great  European  crisis 
in  1866  because  we  had  become  economically  independent 
during  the  war.  The  short  depression  of  1869  might  be  more 
properly  classed  as  a  reflex  of  Civil  War  conditions.  Just  how 
the  depression  of  1873  could  be  connected  with  the  Civil  War 


HISTORY  OF  BUSINESS  DEPRESSIONS  163 

is  not  apparent.  It  was  eight  years  following  the  close  of 
the  war.  The  national  banking  system  had  been  firmly 
established,  and  preparations  had  been  made  to  carry  the 
war  debt  over  a  period  of  years.  No  trouble  was  seen  ahead 
in  meeting  interest  payments  as  the  principal  was  grad- 
ually retired.  For  a  country  as  large  as  the  United  States, 
its  national  indebtedness,  as  well  as  its  per  capita  indebt- 
edness, was  not  abnormal  in  the  year  1870.  Statistics  again 
offset  these  claims  because  they  show  that  the  absorption 
of  capital  in  the  expanding  enterprises  of  the  country  be- 
tween 1866  and  the  crisis  of  1873  was  as  large  as  the  cost  of 
the  war  itself.  Therefore,  it  is  clear  that  such  inflated  credits 
for  peace  enterprises  was  due  to  come  to  a  sudden  halt. 

This  was  the  tenth  year  of  the  existence  of  the  national 
banking  system  and  there  were  1,980  banks  in  operation. 
Coincident  with  the  failure  of  Jay,  Cooke  &  Co.,  New 
York,  was  the  failure  of  the  First  National  Bank  of  Wash- 
ington and  the  National  Bank  of  the  Commonwealth,  New 
York.  The  widespread  distrust  brought  depositors  to  de- 
mand their  money  and  the  country  banks  drew  upon  their 
city  reserves.  "Between  September  12  and  December  26 
the  aggregate  individual  deposits  were  reduced  from  $622,- 
685,563  to  $540,510,602,  and  amounts  due  from  reserve 
agents  from  $96,134,120  to  $73,032,046.  The  New  York 
clearing  house  issued  certificates  upon  the  bills  receivable 
and  other  assets  of  its  member  banks,  thus  following  a 
precedent  first  set  in  1860.  These  certificates  took  the  place 
of  cash  and  allowed  the  banks  to  retain  cash  in  their 
vaults.  With  some  exceptions  they  were  accepted  by  the 
public,  and  the  measure  was  effective  as  a  whole."  There 
were  no  other  failures,  and  in  New  York  within  two  months 
the  runs  had  ceased, 

The  country  banks  suffered  materially  and  business  was 
generally  prostrated.  The  terrible  distress  prevalent  im- 
pressed the  public  mind  to  such  an  extent  that  the  causes 
of  the  catastrophe  were  earnestly  looked  into.  Speculation 


164  HISTORY  OF  BUSINESS  DEPRESSIONS 

was  commonly  accused  of  being  at  the  bottom  of  it  all. 
From  a  banking  standpoint  the  view  was  taken  that  "the 
provisions  of  law  requiring  or  permitting  national  banks 
to  keep  a  large  proportion  of  their  reserves  in  the  financial 
centres  collected  a  larger  proportion  of  the  currency  there 
than  could  be  used  for  legitimate  business.  Moreover,  the 
city  banks  in  competition  among  themselves  bid  for  these 
deposits  from  the  outside  banks  by  offering  to  pay  interest 
upon  them.  In  order  to  make  a  profit  the  banks  were  forced, 
in  the  absence  of  other  opportunities,  to  loan  to  speculators, 
and  thus  the  overtrading  and  speculation  which  are  so  apt 
to  end  in  financial  disaster  were  encouraged.  Even  the  New 
York  Clearing  House  Association,  seized  with  a  "spasm  of 
virtue,"  as  one  writer  put  it,  appointed  a  committee  to  make 
recommendation  to  prevent  the  repetition  of  such  panics. 
This  committee  brought  back  resolutions  "against  the  prac- 
tice of  certifying  checks  where  there  was  not  a  correspond- 
ing credit  to  the  drawer,"  a  widespread  practice  in  those 
days,  and  against  all  the  well  known  rules  of  banking.  Oth- 
ers thought  the  crisis  could  have  been  avoided  by  requiring 
prompt  redemption  of  national  bank  notes  so  that  the  banks 
would  have  to  keep  their  reserves  in  their  own  vaults  for 
that  purpose  instead  of  sending  them  to  larger  centers  to 
get  interest.  The  agitation  led  to  the  banking  law  of 
1874,  which  "permitted  the  banks,  whatever  their  capital, 
to  withdraw  their  bonds  down  to  a  minimum  of  $50,000  by 
depositing  lawful  money  with  the  United  States  Treasurer 
to  retire  their  circulating  notes."  This  law  had  immediate 
effect  in  inducing  the  voluntary  retirement  of  a  large 
amount  of  circulation  by  banks.  There  was  at  this  time  a 
premium  of  over  12  per  cent  in  currency  upon  the  6  per 
cent  United  States  bonds  deposited  by  the  banks  as  security 
for  their  circulation. 

The  Homestead  Act  had  contributed  its  full  share  to  the 
craze  for  investment.  The  pioneer  farmers,  eager  to  im- 
prove their  new  farms,  borrowed  from  eastern  capitalists, 


HISTORY  OF  BUSINESS  DEPRESSIONS  165 

mortgaging  their  lands  to  them.  They,  like  the  railroad 
companies,  made  the  mistake  of  investing  in  improvements 
more  money  than  they  could  make  good  out  of  their  surplus 
products  for  years  to  come.  The  eastern  money-lender 
was  loath  to  foreclose  the  mortgage  and  take  the  land  in 
lieu  of  payment — an  asset  that  could  not  readily  be  con- 
verted into  cash.  Thus,  as  Coman  puts  it,  "A  Kansas  mort- 
gage became  the  synonym  for  a  losing  investment " 

Congress  met  in  December  of  that  year,  and  the  intense 
excitement  prevailing  was  reflected  in  the  deliberations  of 
that  body.  Over  sixty  different  bills  and  resolutions  were 
referred  to  the  Senate  Committee  on  Finance.  Methods  and 
proposals  of  various  sorts  were  put  forward  to  relieve  the 
prevalent  distress  and  provide  against  repetition  in  the 
future.  The  various  legal  tender  acts  had  authorized  issues 
of  $450,000,000  of  legal  tender  notes,  on  which  amount 
$50,000,000  had  been  maintained  as  a  reserve  for  the  re- 
demption of  temporary  loans.  They  had  been  permanently 
retired  when  the  temporary  loans  were  funded,  so  that  the 
legal  tender  issues  stood  at  $400,000,000.  This  amount  had 
been  diminished  to  $356,000,000  when  further  contraction 
was  stopped.  In  addition  to  these  legal  tender  notes,  the 
law  allowed  an  issue  of  $354,000,000  in  national  bank  notes, 
most  of  which  were  in  circulation.  Pressure  was  brought 
to  bear  on  the  Secretary  of  the  Treasury  to  treat  the  $44,- 
000,000  of  retired  legal  tender  notes  as  not  permanently 
retired  but  as  a  reserve,  and  yielding  to  this  demand  the 
greater  part  of  this  sum  was  put  back  into  circulation  to 
relieve  the  strain.  As  usual,  in  the  troubles  of  those  days, 
a  great  many  blamed  the  currency  system.  It  was  after- 
ward obvious  that  there  was  ample  currency,  but  too  much 
of  it  was  tied  up  in  speculative  channels  instead  of  in  pro- 
ductive trade.  But  cheap  money  agitators  have  always  been 
the  most  clamorous  because  their  ideas  appealed  to  the  public 
which  was  not  educated  on  the  question. 

The  scarcity  of  money  was  most  severely  felt  in  the  West 


166  HISTORY  OF  BUSINESS  DEPRESSIONS 

and  South,  and  banks  in  those  sections  claimed  that  they 
had  not  received  their  full  share  of  the  distribution  of  cir- 
culation, so  that  these  sections  were  eager  to  take  up  the 
cry  of  more  circulating  medium.  These  people  pointed  out 
that  currency  actually  contracted  by  the  retirement  of  legal 
tender  notes  in  the  face  of  greatly  expanded  business, 
manufacturing  and  agriculture,  railroads,  etc.,  and  in- 
creased population.  They  claimed  the  money  circulation 
should  keep  apace  with  increase  in  population  and  the 
growing  demands  of  the  people.  At  that  time  the  per  cap- 
ita proportion  of  the  United  States  was  much  under  the 
per  capita  in  France  and  England.  The  opponents  of  the 
plan  pointed  out  that  increased  circulation  only  tended  to 
raise  prices,  make  the  cost  of  living  higher  and  worked  a 
hardship  on  the  poorer  classes;  that  a  reasonable  amount 
of  money  was  provided  by  the  present  law,  if  it  was  taken 
out  of  unproductive  channels  which  brought  no  immediate 
return  and  placed  in  active  producing  channels.  It  also 
was  pointed  out  that  railroad  building  had  been  over- 
done. Large  stocks  of  manufactured  products  were  on  hand 
and  the  capital  was  tied  up  in  speculative  investments 
which  locked  the  money  up  until  it  could  gradually  be  re- 
leased. They  pointed  out  also  that  further  inflation  of 
money  would  only  bring  another  day  of  reckoning  and  that 
the  period  of  deflation  must  be  allowed  to  take  its  course. 
This  class  advocated  the  return  to  specie  payment,  which 
became  an  issue  in  the  following  years.  Those  favoring  a 
still  larger  issue  of  legal  tender  currency  organized  the 
Greenback  Party,  while  those  demanding  a  return  to  specie 
payment  remained  in  the  old  parties.  That  the  money 
stringency  was  not  as  bad  as  the  inflationists  made  out  was 
shown  in  the  voluntary  retirement  of  their  currency  by  the 
national  banks  of  the  east  and  withdrawal  of  bonds  during 
the  period. 

The  Republicans  had  demonetized  silver  and  the  depres- 
sion hit  particularly  hard  those  men  who  were  interested 


HISTORY  OF  BUSINESS  DEPRESSIONS  167 

in  the  mining  of  silver,  for  although  silver  had  formerly 
been  so  high  that  the  metal  in  a  silver  dollar  had  been  worth 
a  few  cents  more  than  a  dollar,  the  discovery  of  new 
sources  of  supply  threatened  to  overturn  the  price  of  this 
metal  in  the  market.  "The  silver  producers,  being  human, 
tried  to  find  some  reason  for  their  distress  other  than  their 
own  thoughtless  action  in  producing  more  silver  than  the 
market  could  absorb.  Perceiving  that  the  Government 
might  be  a  good  customer  if  it  were  coining  silver  dollars, 
the  silver  men  immediately  charged  the  leaders  of  the 
Republican  party  with  having  conspired  secretly  to  cut  out 
the  coining  of  dollars  purely  out  of  spite  against  certain 
western  states,  whose  chief  product  was  silver.  The  charge 
of  conspiracy  was  absurd,  and  the  whole  accusation  is  very 
plainly  a  case  of  trying  to  shirk  responsibility.  Hence  the 
phrase  "crime  of  '73"  was  fastened  upon  a  very  innocent 
and  unoffending  law." 

It  was  during  this  period  that  the, agitation  started  for 
the  free  coinage  of  silver  which  continued  for  twenty-five 
years,  being  favored,  alternately,  by  both  parties  until  the 
question  was  finally  settled  by  the  election  of  1896. 

Hyndman,  an  European  writer,  describing  money  condi- 
tions in  America  after  the  depression,  said:  "As  usual 
in  all  countries  after  a  crash,  instead  of  looking  into  the 
methods  of  production,  and  the  unregulated  maladministra- 
tion of  capital,  the  rich  and  their  governments  began  to 
overhaul  the  banking  system  and  those  currency  arrange- 
ments which,  however  defective  they  may  be,  cannot  by 
any  possibility  create  an  industrial  crisis,  though  they  may 
and  do  intensify  one  when  it  comes." 

Some  writers  claim  that  had  there  been  prompt  and 
united  action  on  the  part  of  the  bankers  with  the  United 
States  Treasury  the  worst  of  the  money  difficulties  of  this 
year  could  have  been  avoided.  Henry  Clews  charged  bank 
managers  with  having  acted  "without  judgment  and  almost 
entirely  without  any  well  defined  plan  of  action.  There 


168  HISTORY  OF  BUSINESS  DEPRESSIONS 

had  been  an  astonishing  lack  of  vigor  in  their  methods  and 
purposes,  which  were  weak  and  vacillating  in  their  char- 
acter— frequently  more  like  the  acts  of  children  than  those 
of  business  men." 

Various  other  causes  have  been  given  for  the  panic. 
Among  them  were : 

(1)  Over   expansion   of   the   railroads.      A    large 
amount  of  money  being  sunk  in  property  which  could 
not  pay  an  immediate  dividend  because  of  the  un- 
developed  state  of  their  traversed  territory.      When 
stockholders  found  the  promised  dividends  were  not 
forthcoming,  they  naturally  grew  wary  of  further  in- 
vestments, bringing  financial  embarrassment  to  new 
and  uncompleted  roads. 

(2)  The  money  question,  the  demonetization  of  sil- 
ver causing  fluctuation  in  the  value  of  our  currency. 

(8)  Over-extension  of  credit  by  the  banks  to  the  peo- 
ple, in  general  resulting  in  over-expansion  of  the  busi- 
ness beyond  the  capacity  of  the  financial  system  to 
handle. 

(4)  Some  writers  refer  to  the  Chicago  and  Boston 
fires  and  their  attendant  heavy  losses  as  one  of  the 
causes  of  depression. 

Another  feature  that  added  to  the  distress  was  the  repu- 
diation of  bonds  by  southern  states.  The  sovereign  State 
of  Georgia  in  this  year  repudiated  the  bonds  issued  by  the 
"Carpet-Bag"  administration. 

Effects  were  seriously  felt  in  California  by  the  suspen- 
sion of  the  National  Gold  and  Trust  Company  of  San  Fran- 
cisco. Nine  national  gold  banks  were  operating  in  that 
State  with  a  gold  note  circulation  of  $2,630,000.  These 
notes  were  hurried  in  for  redemption,  having  had  bad  effect 
upon  business  in  that  section.  Gold  was  popular  anyhow  in 
the  western  states  and  more  or  less  prejudice  existed 
against  paper  currency,  although  such  paper  today  would 
be  eagerly  taken  in  preference  to  the  gold.  The  first  year 
following  the  panic  saw  5,183  failures,  with  a  loss  of  $228,- 
600,000,  and  during  the  three-year  period  of  depression 
over  20,000  failures  were  recorded  with  a  money  loss  total- 


HISTORY  OF  BUSINESS  DEPRESSIONS  169 

ing  nearly  a  billion  dollars.  Three  million  men  were  thrown 
out  of  employment  with  a  consequent  curtailment  of  de- 
mand for  goods.  More  than  450,000  immigrants  came 
into  the  country  in  1873,  which  greatly  augmented  the  un- 
employment. 


CHAPTER  XVIII 
THE  DEPRESSION  OF  1878. 

The  business  depression  of  this  year  was  brought  about 
through  the  uncertainty  of  the  financial  situation.  In 
1875  Congress  had  passed  a  law  giving  the  banks  four 
years  in  which  to  prepare  to  resume  specie  payment,  the 
date  of  resumption  being  fixed  at  January  1,  1879.  Busi- 
ness slowed  down  to  see  if  the  banks  would  be  able  to  com- 
ply with  the  law.  As  the  time  grew  near  there  was  consid- 
erable agitation  for  the  repeal  of  the  law.  Conditions  of 
the  country  were  described  as  full  of  "desolation  and  anx- 
iety, and  actual  want,  that  reign  in  hundreds  and  thousands 
of  households  throughout  the  length  and  breadth  of  the  land, 
wrought  by  this  infamous  resumption  robbery."  Time 
proved  that  the  public  was  more  frightened  than  hurt,  but 
business  was  suffering  because  of  the  uncertainty.  Gen- 
eral Garfield  insisted  that  the  country  was  fundamentally 
sound  and  underlying  conditions  satisfactory.  He  favored 
resumption.  Opponents  of  resumption  claimed  that  busi- 
ness would  improve  if  the  act  was  repealed.  They  argued 
that  the  national  banking  system  was  the  main  cause  of 
the  distress  that  existed  and  advocated  a  free  issue  of  na- 
tional currency,  known  at  the  time  as  "greenbacks."  It 
was  during  this  agitation  that  the  Greenback  Party  arose  to 
prominence. 

Resumption  talk  was  on  every  tongue.  Horace  Greeley, 
deploring  the  resulting  chaos  and  uncertainty  insisted,  "The 
way  to  resume  is  to  resume." 

In  the  year  previous,  1877,  a  panic,  confined  wholly  to 
the  savings  banks,  began  in  New  York  and  swept  over  the 
country.  The  uncovering  of  some  unsavory  methods  had 
led  to  the  general  distrust  in  these  institutions.  Even  the 


HISTORY  OF  BUSINESS  DEPRESSIONS  171 

strongest  of  these  banks  were  put  to  a  crucial  test.  So 
great  was  the  distress  that  most  of  them  were  obliged  to 
require  notice  from  depositors.  This  started  the  first  agita- 
tion for  laws  which  are  now  general,  requiring  sixty  days7 
notice  for  withdrawal  of  savings  funds. 

Desperate  efforts  to  repeal  the  resumption  act  failed,  and 
on  the  day  of  resumption  the  Secretary  held  $135,382,639 
of  gold  coin  and  bullion,  and,  in  addition,  over  thirty-two 
millions  of  silver  coin  and  bullion  ($32,476,095),  the  gold 
alone  being  nearly  40  per  cent  of  the  United  States  notes 
then  outstanding. 

Ex-Comptroller  Knox  said:  "The  banks  of  the  country 
at  the  date  of  resumption  held  more  than  one-third  of  the 
outstanding  Treasury  notes;  but  they  had  so  much  confi- 
dence in  the  ability  of  the  Secretary  to  maintain  resump- 
tion that  none  were  presented  by  them  for  redemption.  The 
people  also,  who  held  more  than  three  hundred  millions  of 
the  issues  of  the  national  banks,  based  upon  the  bonds  of  the 
nation,  preferred  such  notes  to  coin  itself.  There  was, 
therefore,  no  demand  for  payment  of  the  notes  of  the  Gov- 
ernment, and  the  gold  coin  of  the  treasury  increased  more 
than  thirty-six  millions  in  the  ten  months  succeeding  the 
date  of  resumption." 

It  can  be  seen  now  that  the  greatest  evil  of  that  day  was 
the  delay  in  putting  the  law  into  effect.  The  uncertainty 
had  lessened  production  and  led  to  stringent  money  condi- 
tions. Too  much  importance  was  given  to  the  resumption 
law  and  to  the  contraction  of  legal  tender  notes.  Business 
wa«*  simply  languishing  from  the  effects  of  the  panic  of 
1873;  it  had  started  to  recover,  but  sank  back  into  decline 
when  the  agitation  started  on  the  resumption  question. 

Thus,  after  a  great  deal  of  needless  stress  and  agitation 
involving  the  failure  of  business  concerns  in  the  short  time 
previous,  amounting  to  $500,000,000,  the  country  passed 
on  to  a  period  of  prosperity  on  a  sound  financial  footing. 
The  economy  that  prevailed  during  the  depressed  times 


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HISTORY  OF  BUSINESS  DEPRESSIONS 


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HISTORY  OF  BUSINESS  DEPRESSIONS 


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174  HISTORY  OF  BUSINESS  DEPRESSIONS 

made  prices  of  agricultural  and  manufactured  commodities 
cheap  and  we  exported  large  quantities,  bringing  a  favor- 
able trade  balance  and  an  influx  of  gold.  All  of  this  helped 
to  bring  about  favorable  conditions  at  the  time  of  resumption 
so  that  the  various  dire  predictions  did  not  mature. 


CHAPTER  XIX 
THE  DEPRESSION  OF  1884 

The  collapse  of  1884  occurred  suddenly  and  with  only  a 
short  preceding  depression.  In  August  of  1883  a  rumor 
started  that  the  failure  of  a  firm  of  brokers  had  involved 
the  Wall  Street  National  Bank.  An  examination  by  the 
authorities  showed  over-certification  of  checks.  The  amount 
was  nearly  $200,000  and  the  bank,  in  order  to  avoid  re- 
ceivership, went  into  voluntary  liquidation.  This  was  the 
beginning  of  the  crisis  of  1884,  the  number  of  mercantile 
failures  in  the  latter  part  of  1883  having  precipitated  the 
crisis.  The  year  opened  unfavorably  with  the  appointment 
of  a  receiver  for  the  New  York  and  New  England  Railroad. 
Shortly  after  came  the  troubles  of  the  Oregon  and  Trans- 
continental Company  and  the  North  River  Construction 
Company.  In  February,  March  and  April  commercial  fail- 
ures followed.  Stocks  and  securities  fell  rapidly.  On  May 
6th  the  Marine  National  Bank  failed,  involving  houses  that 
were  connected  with  it,  one  of  which  was  Grant  &  Ward, 
with  $17,000,000  of  liabilities,  and  a  few  days  later  the 
president  of  the  Second  National  Bank  of  New  York  checked 
up  $3,185,000  short.  This  institution,  however,  did  not  fail 
because  its  directors  immediately  made  good  the  defalcation. 
In  one  week  three  New  York  banks  failed,  the  Second  Na- 
tional, the  Marine  and  the  Metropolitan,  due  to  mismanage- 
ment and  unwarranted  speculation.  The  stringency  ex- 
isting in  the  money  market  was  occasioned  by  the  displace- 
ment of  gold,  by  the  newly  coined  silver,  and  by  draining 
of  reserve  which  had  gone  into  railroad  development  and 
other  speculative  enterprises.  Confidence  was  shaken  to  its 
foundations,  however,  and  institutions  of  every  kind  that 
were  not  in  a  strong  position  suffered  embarrassment  or 


176  HISTORY  OF  BUSINESS  DEPRESSIONS 

complete  failure.  May  14  the  Metropolitan  National  Bank 
failed,  together  with  several  private  bankers  and  brokers. 
The  same  day  the  Newark  Savings  Bank,  Newark,  N.  J.,  sus- 
pended, followed  in  rapid  succession  by  big  institutions, 
such  as  the  West  Shore  Railroad,  the  Philadelphia  and 
Reading  and  many  others.  The  failures  caused  great  ex- 
citement. It  was  practically  impossible  for  banks  to  col- 
lect their  call  loans  as  the  borrowers  could  not  obtain  money 
by  the  sale  of  their  securities  except  at  ruinous  sacrifices. 
The  New  York  clearing  house  again  issued  certificates  which 
found  ready  acceptance  among  the  business  people  and  as- 
sisted in  allaying  the  excitement  and  stopping  the  heavy 
withdrawals.  The  country  banks  experienced  similar  dif- 
ficulties. Eleven  New  York  banks  were  placed  in  the  hands 
of  receivers  during  the  year  and  more  than  one-hundred 
state  banks  and  banking  firms  throughout  the  country  failed 
with  liabilities  exceeding  $32,000,000. 

Smaller  institutions  failed  in  every  state,  but  there  was 
no  suspension  of  gold  and  currency  payments  at  any  point, 
and  the  issue  of  loan  certificates  was  confined  to  the  banks 
of  New  York  City,  and  these  banks  were  soon  enabled  to 
collect  their  loans  and  made  good  their  reserves.  Specie  pay- 
ment had  been  resumed  in  1879,  since  which  time  no  form 
of  United  States  currency  has  been  at  a  discount.  Inter- 
national bimetalists  of  repute  and  authority  attributed  the 
bitter  experience  of  trade  and  industry  in  1884  "to  the  wan- 
ton mischief  perpetrated  by  Germany  between  1871  and 
1875  in  demonetizing  silver." 

The  country  was  now  on  a  silver  basis,  a  total  of  $369,- 
400,000  silver  dollars  having  been  coined  and  put  into  circu- 
lation. In  1880  the  per  capita  circulation  was  $22.82. 
While  this  large  amount  of  silver  was  put  out  gold  was 
leaving  the  country,  $32,000,000  in  gold  being  exported  in 
1882  and  $41,000,000  in  1884.  Silver  superseded  gold  in 
payments  on  government  obligations  as  well  as  in  private 


HISTORY  OF  BUSINESS   DEPRESSIONS  177 

exchanges.  The  depreciated  value  of  this  money  helped 
largely  to  bring  on  the  crisis  of  that  year. 

*"In  the  year  1883  the  contraction  of  the  National  Bank 
circulation,  due  to  the  rapid  payment  of  the  debt  of  the 
United  States,  began  to  be  very  noticeable.  During  the 
year  ending  November  1,  1883,  more  than  one  hundred  and 
five  millions  of  the  public  debt  were  called  in  and  paid,  and 
all  of  the  remaining  31/2  per  cents  were  called  for  payment 
and  had  ceased  to  bear  interest.  Nothwithstanding  the  fact 
that  262  new  banks  were  organized  with  a  capital  of  $28,- 
654,350,  depositing  $9,375,550  of  bonds  as  security  for 
circulating  notes,  the  aggregate  amount  of  bonds  on  de- 
posit for  that  purpose  had  diminished  from  $362,490,650 
to  $352,907,300,  a  reduction  of  $9,583,350.  More  than 
forty  millions  of  3Vk  per  cent  bonds  held  by  the  banks  the 
previous  year  had  been  withdrawn  or  called  for  payment, 
the  3's  had  increased  less  than  twenty-two  millions,  and  the 
4's  and  4^'s  less  than  nine  millions." 

Among  the  characters  prominent  in  this  disturbance  were 
Ferdinand  Ward,  James  D.  Fish,  George  I.  Seney,  and  John 
C.  Eno.  It  is  said  that  the  Metropolitan  Bank,  the  largest 
failure,  was  due  to  Seney's  misfortune  in  speculations. 
Seney  was  the  president.  He  also  owned  various  railroad 
stocks.  The  system  of  operating  was  unusual  even  for  Wall 
Street.  After  organizing  railroad  enterprises,  instead  of 
starting  with  a  moderate  stock  issue,  he  boldly  proceeded  to 
water  them  lavishly  with  unvarying  exception. 

Future  prospects  of  the  properties  were  painted  in  glow- 
ing colors  and  the  public  bought  freely,  probably  for  the 
reason  that  they  at  once  became  active  stocks  on  the  market. 
It  was  later  found  that  this  was  done  through  the  system 
of  "wash"  sales,  through  which  orders  were  executed  to  buy 
and  sell  both  by  the  same  man,  which  in  this  case  was 
Seney  himself.  This  process  was  costly  in  commissions,  and 
yet  that  was  insignificant  to  the  advertising  of  the  stocks 

*Knox,  "History  of  Banking." 


178  HISTORY  OF  BUSINESS  DEPRESSIONS 

and  their  constantly  enhanced  value.  Seney  was  able  to 
keep  up  this  practice  over  a  period  of  years  largely  because 
of  his  philanthropic  activities. 

John  C.  Eno  was  in  some  respects  the  most  spectacular 
comet  that  ever  blazed  across  the  financial  heavens.  He  was 
only  twenty-six  years  of  age  and  was  president  of  the  Second 
National  Bank,  although  it  must  be  said  that  this  position 
had  not  been  acquired  through  his  own  efforts,  but  through 
his  father,  who  was  a  very  wealthy  man.  Young  Eno  was 
very  rash  and  classed  as  one  of  the  reckless  youths  who 
plunged  into  speculations  without  regard  to  consequences. 
Speculative  tendencies  and  constant  losses  caused  him  to 
loot  the  Second  National  Bank  of  practically  all  of  its  cur- 
rency. When  this  was  discovered  John  Eno  left  for  Canada, 
and  naturally  trouble  followed  for  the  bank,  although  his 
father  made  good  practically  all  of  the  $4,000,000  which 
his  son  had  stolen. 

Ferdinand  Ward  was  a  financier  and  made  a  partnership 
with  General  Grant,  then  President,  under  the  firm  name 
Grant  &  Ward. 

Henry  Clews  writes:  "The  transactions  of  the  four 
prominent  speculators  who  played  the  most  conspicuous 
part  in  the  events  which  resulted  in  the  panic  of  May,  1884, 
should  be  preserved  for  reference,  as  a  guide  when  similar 
cases  arise,  for  in  spite  of  the  deep  disgrace,  shame  and 
misery  that  have  followed  in  the  wake  of  their  enterprises, 
these  men  will  have  hosts  of  imitators  for  many  years  to 
come.  Ward,  Fish,  Seney  and  Eno,  with  probably  the  one 
exception,  Fish,  are,  by  many,  considered  smart  men,  who 
simply  had  the  misfortune  to  become  involved,  but  who  had 
a  fair  chance  of  coming  out  of  all  their  troubles  great  mil- 
lionaries  and  publiciy  honored  for  their  ability  and  suc- 
cess." 

There  had  been  administrative  mismanagement  of  im- 
portant railway  companies,  an  excessive  construction  of  rail- 
ways, and  a  wasteful  investment  of  capital  in  non-paying 


HISTORY  OF  BUSINESS  DEPRESSIONS  179 

enterprises.  Iron  and  steel  industries  were  consequently 
seriously  affected,  and  this  in  turn  extended  the  circle  of 
disturbance.  Many  mines  were  shut  down,  and  for  a  time 
there  was  a  large  army  of  unemployed.  The  presidential 
campaign  was  on  and  the  expression  "pauper  labor"  was 
created  as  an  issue  in  the  campaign. 

As  an  indication  of  the  depressed  conditions  at  the  time, 
it  may  be  noted  that  wheat  fell  to  64  cents  a  bushel,  one- 
half  its  normal  price  for  that  period,  thus  causing  enormous 
losses  to  farmers  who  were  unable  to  pay  their  loans  to 
banks  and  eastern  capitalists. 

Describing  the  condition  of  the  farmers  in  Kansas  follow- 
ing the  depression  of  1884,  Mr.  Frank  Wilkeson  wrote  in  the 
New  York  Times  as  follows :  "It  is  a  financial  impossibility 
in  this  era  of  agricultural  competitive  warfare  for  a  farmer 
of  average  intelligence  and  skill  who  tills  a  farm  of  one 
hundred  acres  of  land,  except  corn  land,  to  lift  a  mortgage 
of  say  $1,000  with  money  earned  by  growing  staple  crops. 
And  nine-tenths  of  all  the  uplands  lying  west  of  the  97th 
meridian  are  utterly  unfit  to  produce  corn,  excepting  in 
excessively  wet  seasons."  The  picture  given  of  life  on  Sat- 
urday in  a  Kansas  town  is  certainly  a  startling  one.  "It 
matters  not  how  dull  the  town  has  been  during  the  week, 
on  Saturday  the  streets  are  crowded  with  people;  on  that 
day  chattels  are  sold  to  satisfy  the  overdue  mortgages.  At 
present  these  sales  are  numerous  in  the  West,  outside  of  the 
corn  belt,  and  a  very  large  portion  of  these  do  not  realize 
sufficient  to  pay  the  mortgages." 

The  situation  gave  evidence  of  underlying  strength,  and, 
notwithstanding  the  high  rates  of  money  and  a  tremendous 
drop  in  prices,  there  were  only  a  few  bank  failures.  At  the 
close  of  the  year  equilibrium  was  re-established,  although 
the  losses  had  risen  to  $240,000,000.  These  losses,  it  is 
true,  were  largely  borne  by  financiers  and  speculators,  rather 
than  by  manufacturers  and  traders.  During  the  fiscal  year 


180  HISTORY  OF  BUSINESS  DEPRESSIONS 

1884  the  excess  of  exports  over  imports  of  gold  amounted 
to  $18,250,640. 

Causes  of  the  crisis  and  depression  were  a  scarcity  of 
money  bringing  the  numerous  business  failures,  decline  of 
prices,  and  underlying  fear  that  the  United  States  Treasury 
might  find  it  necessary  to  resort  to  payment  in  silver. 


CHAPTER  XX 
THE  DEPRESSION  OF  1889-90 

In  this  year  we  had  an  instance  of  depression  setting  in 
first,  followed  by  a  panic.  Agricultural  interests  were  in  an 
unsatisfactory  condition  and  the  outlook  was  unfavorable. 
The  only  activity  recorded  during  the  year  1889  of  any  con- 
sequence was  the  completion  of  railroads  which  was  being 
prosecuted  with  unusual  vigor,  apparently  because  it  was 
obvious  that  trouble  was  ahead.  Immense  sums  of  capital 
of  New  England  had  been  loaned  in  the  Mississippi  Valley 
and  Pacific  Coast  states  on  securities  which  in  many  cases 
were  not  even  paying  interest.  The  depression  was  felt 
principally  in  the  West  and  South,  due  to  poor  crops  and 
an  enormous  outflow  of  money  to  pay  high  interest  rates 
which,  in  the  face  of  low  prices  of  products,  was  a  burden 
that  thousands  of  farmers  could  not  carry.  A  large  move- 
ment of  capital  to  this  section  had  made  money  stringent, 
in  the  East.  Various  banking  institutions  found  them- 
selves with  low  reserves  at  the  end  of  1889.  Capital  had! 
been  so  attracted  by  the  new  enterprises  in  the  West  that 
eastern  business  men  were  unable  to  obtain  accomodations 
and  a  severe  depression  spread  over  that  section.  When  it 
was  evident  that  western  investments  would  not  materialize 
favorably,  it  was  felt  that  there  was  trouble  ahead  and 
preparations  were  made  for  the  expected  collapse.  Europe 
was  passing  through  a  period  of  liquidation  and  loss  conse- 
quent upon  the  failure  of  the  Panama  Canal  Company  in 
France  and  unfavorable  South  American  investments  in 
England.  In  order  to  strengthen  the  cash  reserves  gold 
was  shipped  from  this  country,  causing  still  further  weak- 
ness in  our  own  situation.  The  depression  lasted  the  whole  of 
1889  and  well  into  the  year  1890. 


182  HISTORY  OF  BUSINESS  DEPRESSIONS 

The  noted  Baring  Brothers'  failure  in  England  in  1890 
was  reflected  in  this  country.  The  embarrassment  of  this 
firm  shook  the  financial  foundations  of  Great  Britain  and 
the  Bank  of  England,  in  order  to  avert  widespread  trouble, 
guaranteed  the  Baring  Brothers'  liabilities  to  the  extent  of 
$75,000,000.  The  Bank  of  England  was  forced  to  borrow 
£3,000,000  in  gold  from  the  Bank  of  France  and  £1,500,000 
from  Russia. 

The  financial  storm  spread  to  this  country,  causing  a 
short  panic  on  Wall  Street.  Probably  our  banks  would  have 
pulled  through  this  crisis  had  it  not  been  for  the  large  with- 
drawals of  gold  previous  to  the  Baring  failure. 

The  Secretary  of  the  Treasury  threw  the  resources  of  the 
country  into  the  breach,  purchasing  over  $99,000,000  worth 
of  United  States  bonds  in  three  months  and  almost  exhaust- 
ing the  available  surplus  in  the  treasury.  The  banks  of 
New  York,  Philadelphia  and  Boston  were  sorely  pressed, 
and  the  issue  of  clearing  house  certificates  was  again  re- 
sorted to  in  order  to  relieve  the  stringency.  The  New  York 
clearing  house  issued  $16,645,000  in  certificates,  Boston  is- 
sued $5,065,000,  Philadelphia  $9,655,000.  In  that  city  the 
Keystone  and  Spring  Garden  National  Banks  failed.  Some 
new  silver  certificates  were  also  issued  and,  while  this 
brought  on  the  renewal  of  the  debate  on  the  money  question, 
it  relieved  the  situation  for  a  time,  until  the  great  panic  of 
1893.  It  was  the  act  of  July  14,  1890,  designed  to  relieve 
the  money  stringency,  that  authorized  a  new  kind  of  paper 
money  called  Treasury  notes.  These  were  to  be  used  in  the 
purchase  of  silver  bullion  at  its  market  price,  at  the  rate  of 
4,500,000  ounces  per  month. 

The  gross  deposits  of  forty-six  national  banks  in  the  city 
of  New  York  showed  a  falling  off  of  $44,831,356  between 
February  28th  and  May  17,  1890.  Messrs.  Charles  M. 
Whitney  &  Co.,  David  Richmond,  J.  C.  Walcott  &  Co.,  Mills, 
Roberson  &  Smith,  Randall  &  Wierum,  Gregory  &  Ballou, 
P.  Gallaudet  &  Co.,  failed  in  New  York,  the  North  River 


HISTORY  OP  BUSINESS  DEPRESSIONS  183 

Bank  of  that  city  was  thrown  into  receivership,  and  in 
Philadelphia  the  failure  of  Barker  Brothers  was  followed 
by  a  number  of  others.  Business  was  further  adversely  af- 
fected by  apprehension,  due  to  changes  in  the  tariif  schedule. 
Business  men  entertained  uneasiness  as  to  the  future,  and 
precaution  was  deemed  necessary  in  all  transactions.  This 
depression  was  almost  entirely  confined  to  the  East  and  the 
Middle  West,  and  was  not  felt  at  all  in  the  Pacific  Coast 
states. 

Farm  and  home  proprietorship  and  indebtedness  were 
made  the  subject  of  statistical  investigation  in  the  Eleventh 
Census  by  special  act  of  Congress.  No  previous  census  had 
undertaken  a  similar  work.  It  was  due  primarily  to  the 
efforts  of  Mr.  B.  C.  Keeler,  of  St.  Louis,  Mo.  In  1889,  at  a 
meeting  of  the  St.  Louis  Single  Tax  League*,  he  offered  a 
resolution  requesting  the  Suprintendent  of  the  Census  to 
undertake  the  investigation  covered  by  this  report.  The 
idea  was  at  once  taken  up,  and  various  farmer  and  labor 
organizations  invited  to  co-operate  in  the  work. 

The  report  showed  that  the  farms  cultivated  by  owners 
and  subject  to  incumbrance  numbered  886,957,  and  the 
value,  as  reported,  was  $3,054,923,165.  New  York  had  a 
larger  aggregate  value  of  such  farms  than  any  other  state, 
totaling  $309,352,398 ;  Iowa  was  second,  with  $305,658,669, 
and  Illinois  third,  with  $285,706,170.  More  than  two-thirds 
of  the  value  of  this  class  of  farms  in  the  United  States  was 
found  in  the  North  Central  division,  and  only  4.63  per  cent 
of  the  total  value  in  the  South  Atlantic  and  South  Central 
divisions.  Upon  the  owned  and  incumbered  farms  there  was 
an  incumbrance  amounting  to  $1,085,905,960,  and  there  are 
two  states  in  which  the  amount  was  at  least  $100,000,000, 
namely,  New  York,  with  $134,960,703  and  Iowa  with  $101,- 
745,924.  There  was  an  incumbrance  of  $98,940,935  in 
Illinois,  and  an  amount  not  less  than  $50,000,000  nor  more 


*Nourse  Agricultural  Economics  pp.  716-717. 


184 


HISTORY   OF  BUSINESS   DEPRESSIONS 


5 


- 

P 


HISTORY   OF   BUSINESS  DEPRESSIONS  185 

than  $75,000,000  in  each  of  the  states  of  Kansas,  Michigan, 
Missouri,  Ohio,  Pennsylvania,  and  Wisconsin;  30.91  per 
cent  of  the  incumbrance  was  concentrated  in  the  three 
states,  Illinois,  Iowa,  and  New  York;  51.01  per  cent  in  the 
six  states,  Illinois,  Iowa,  Kansas,  New  York,  Ohio,  and 
Pennsylvania;  and  71.37  per  cent  in  the  ten  states,  Illinois, 
Iowa,  Kansas,  Michigan,  Missouri,  Nebraska,  New  York, 
Ohio,  Pennsylvania,  and  Wisconsin.  The  smaller  amounts 
are  found  in  the  Southern  States  and  the  Rocky  Mountain 
region. 


CHAPTER  XXI 
THE  DEPRESSION  OF  1893-95 

The  crisis  of  1893,  unlike  others,  notably  those  of  1837, 
1857  and  1873,  did  not  follow  a  great  wave  of  prosperity. 
It  cannot  be  said  that  the  eight  years  preceding  1893  were 
any  better  than  normal  at  the  most.  The  slow  times  that 
set  in  during  Cleveland's  first  administration  continued  to 
some  degree  during  the  whole  of  Harrison's,  and  while  they 
could  not  be  called  depressed  times,  yet  they  were  years  in 
which  very  little  headway  was  being  made.  The  crisis 
started  with  the  failure  of  the  Philadelphia  and  Reading 
Railroad,  February  20th,  which  occasioned  widespread 
alarm  and  brought  uneasiness  to  bank  depositors.  It  was 
known  that  the  banking  institutions  in  New  York  were 
heavily  involved  with  speculative  investments  and  their 
facilities  were  being  strained.  Depositors  in  rural  sections 
began  to  demand  their  cash,  causing  rural  banks  to  call 
upon  their  depositories  in  the  large  centers.  In  many  cities 
clearing  houses  issued  certificates,  notably,  New  York,  Bos- 
ton, Philadelphia,  Baltimore  and  Pittsburg. 

The  depression  which  continued  during  1894  was  ex- 
tremely severe  on  account  of  our  large  and  growing  in- 
dustrial population,  causing  greater  loss  and  more  suffering 
than  ever  before  in  the  history  of  the  country.  The  West 
and  South  were  particularly  demoralized.  Gold  brought  a 
premium  of  4  per  cent.  Commercial  failures  numbered 
8,105  during  the  six  months,  April  1st  to  October  1st,  1893, 
with  liabilities  of  $284,664,624 ;  and  for  the  year  numbered 
15,242  with  the  loss  of  $346,779,889.  Depression  extended 
to  every  industry.  Silver  mines  which  had  been  prosperous 
in  the  previous  days  of  inflated  silver  closed  down  because 
of  the  low  price  of  that  metal.  Production  of  all  mines  and 


HISTORY  OF  BUSINESS  DEPRESSIONS  187 

mills  fell  off  greatly  on  account  of  the  lessened  demand. 
The  farmers  became  involved  on  account  of  the  combination 
of  low  prices  and  crop  failures.  Distress  was  general  and 
want  and  even  hunger  widespread.  The  panic  was  followed 
by  the  Chicago  riots  and  other  disturbances  caused  by  un- 
employment. Coxey's  Army  marched  in  protest  from  Ohio 
to  the  Capitol. 

The  Baring  failure  in  1890  frightened  European  investors 
regarding  American  investments,  even  though  North  Ameri- 
can credits  were  based  on  far  more  substantial  securities 
than  in  South  America.  European  investors  were,  in  many 
cases,  demanding  the  return  of  their  principal  and  were  re- 
fusing to  reinvest  the  interest,  which,  in  itself,  was  an  im- 
portant item.  In  years  past  American  investments  had  as 
a  whole  proven  profitable  for  Europeans,  many  times  en- 
riching the  holders  in  a  few  years.  Under  such  conditions 
little  money  left  the  United  States,  as  in  most  cases  the 
interest  was  reinvested.  But  with  the  withdrawal  of  this 
capital,  which  began  in  1890,  even  the  interest  payments 
called  for  enormous  amounts  of  specie  to  be  shipped  abroad 
without  compensation  in  return.  It  is  estimated  that  the 
annual  interest  payments  to  Europe  alone  were  $350,000,000 
a  year,  and  the  principal  of  the  debt  upon  which  interest 
was  due  was  computed  at  not  less  than  two  billions  of  dol- 
lars, these  figures  being  estimates  published  in  the  New 
York  Journal  of  Commerce. 

Further  cause  for  the  withdrawals  was  the  Sherman 
Silver  Act,  which  caused  Europe  to  fear  the  United  States 
was  going  on  a  silver  basis  and  abandon  the  gold  standard. 

Fuel  was  added  to  the  flames  by  this  agitation  which  led 
to  a  run  on  the  gold  in  the  United  States  Treasury  till  the 
amount  dropped  to  less  than  twenty  millions,  while  the 
amount  in  the  Sub-Treasury  in  New  York  was  reduced  to 
only  about  $8,700,000.  It  was  then — in  February,  1893 — 
that  President  Cleveland  made  his  famous  gold  purchase  of 


188  HISTORY  OF   BUSINESS   DEPRESSIONS 

3,500,000  ounces  of  gold  for  $62,312,500,  giving  in  exchange 
United  States  bonds  to  the  Morgan-Belmont  syndicate.  This 
stopped  gold  exports  and  replenished  the  supply  of  gold  in 
the  Treasury,  and  so  restored  confidence.  The  run  ceased 
and  after  that  the  greatly  increased  customs  duties  began 
to  bring  more  gold  to  the  Government  that  it  had  ever  held 
before. 

The  1893  crisis  largely  revolved  around  the  money  ques- 
tion so  that  a  review  of  the  financial  and  currency  problems 
of  the  period  gives  the  cause  and  effect  of  the  depression. 
The  year  1892  had  been  one  of  artificial  prosperity,  due  to 
the  infusion  of  paper  into  the  currency.  The  paper  money 
was  taken  freely,  and  for  a  short  period  speculation  ran  high. 
Various  speculative  enterprises  were  started;  new  towns 
were  laid  out;  further  manufacturing  developed  and  the 
general  boom  was  on,  but  it  was  the  shortest  boom  we  ever 
had  in  our  history.  On  December  31,  1892,  R.  G.  Dun  & 
Company's  Weekly  Review  of  Trade  said:  "The  most  pros- 
perous year  ever  known  in  business  closes  today  with  strong- 
ly favorable  indications  for  the  future." 

During  the  years  1891  and  1892  the  western  banks'  de- 
posits of  reserve  funds  in  the  East  increased  one-third. 
During  the  same  period  western  deposits  in  New  York  City 
were  doubled.  At  the  close  of  the  year  1892  the  deposits 
of  interior  banks  in  eastern  centers  amounted  to  $204,000,- 
000,  all  payable  on  demand.  When  the  run  of  depositors 
upon  western  and  other  interior  banks  began  in  May,  these 
institutions,  in  order  to  meet  the  urgent  demands  for  cash, 
at  once  recalled  their  reserves  and  other  funds  which  they 
had  on  deposit  in  the  East.  During  the  latter  part  of  June 
the  rates  for  call  loans  in  New  York  ranged  as  high  as  74 
per  cent.  On  July  28th  the  rate  was  72  per  cent,  and  on 
August  4th  51  per  cent  was  demanded.  During  the  height 
of  the  panic  there  was  a  tremendous  shortage  of  currency, 
and  many  expedients  had  to  be  resorted  to  for  the  purpose 
of  supplying  even  the  bare  necessities  of  the  country  for  a 


HISTORY  OF  BUSINESS  DEPRESSIONS  189 

circulating  medium.  In  this  crisis  the  loan  certificates  is- 
sued by  New  York  banks  alone  reached  $38,280,000,  and 
by  the  banks  of  the  entire  country  $63,152,000.  It  was  ap- 
parent that  the  banking  facilities  were  too  weak  to  support 
the  volume  of  business  in  the  country  entirely  outside  of  the 
money  question.  Had  there  not  been  an  over-expansion  of 
credits  the  money  question  would  probably  not  have  en- 
tered into  politics  and  economics  at  that  time. 

An  attempt  was  made  to  solve  the  problem  by  establish- 
ing 371.5  grains  of  silver  as  a  standard  of  payment  for 
existing  liabilities  and  for  the  valuation  of  assets.  This 
device  would  have  doubled  the  proportion  of  assets  to  credit 
liabilities  and  would  have  temporarily  been  an  easy  solution 
of  the  problem,  but  a  large  element  who  thought  it  would 
lead  to  further  trouble  insisted  on  the  gold  standard,  which 
was  later  adopted  in  the  election  of  1896,  after  which  credit 
was  entirely  liquidated  and  the  country  continued  on  a 
sound  basis. 

"Before  the  depression  began,"  writes  Cleveland,  "the 
capital,  surplus,  and  undivided  profits  of  national  banks 
amounted  to  $1,041,807,066.87.  September  15,  1902,  im- 
mediately before  the  October  money  and  credit  stringency 
of  that  year  began  to  be  felt,  the  total  of  capital,  surplus, 
and  undivided  profits  was  only  $1,201,145,882.69,  a  de- 
crease of  nearly  $11,000  per  bank  doing  business.  There 
had  been  an  increase  of  $1,561,335,896.44  in  obligations  to 
depositors,  while  the  gross  increase  in  capitalization  avail- 
able to  support  this  increase  in  demand  liabilities  was  only 
$159,338,815.82,  about  10  per  cent.  The  average  net  in- 
crease in  deposit  liabilities  was  $282,418;  the  net  decrease 
of  capital  was  $10,951  per  bank  doing  business." 

The  passage  of  the  Sherman  Silver  Law,  while  not  a  direct 
cause  of  the  panic,  contributed  indirectly  to  it  because  it 
brought  on  withdrawls  of  gold  from  the  treasury  almost 
from  the  moment  it  was  enacted.  On  June  30,  1890,  the 
total  gold  in  the  treasury  was  $321,612,424.  It  gradually 


190  HISTORY  OF  BUSINESS  DEPRESSIONS 

shrank  until  by  June  30,  1893,  it  had  fallen  to  $188,455,432. 
The  gold  certificates  in  circulation  June  30,  1890,  amounted 
to  $131,380,019;  on  June  30,  1893,  to  $92,970,019,  leaving 
a  net  gold  reserve  on  June  30,  1890,  of  $190,232,405,  which 
dwindled  in  three  years  to  $95,485,413,  and  this  was  the 
total  gold  reserve  that  the  government  had  on  hand  to  com- 
bat one  of  the  greatest  panics  of  our  history.  Gold  exports 
began  in  large  volume  the  month  the  Sherman  law  was  ap- 
proved and  reached  a  total  in  the  fiscal  year  1891  of  $86,- 
862,754;  in  1892  of  $50,195,327,  and  in  1893  of  $108,- 
680,844. 

On  June  1, 1893,  the  banks  of  New  York  held  $21,000,000 
in  excess  of  their  legal  cash  reserves.  The  national  bank 
notes  then  outstanding  were  about  $177,000,000.  The  ex- 
ceptional demands  for  currency  had  drawn  down  the  re- 
serves of  the  New  York  banks,  on  August  1,  $14,000,000 
below  the  legal  minimum. 

President  Cleveland  made  an  earnest  effort  to  secure  the 
repeal  of  the  Sherman  law  in  order  to  convince  the  world 
that  American  money  was  sound  and  that  she  was  ready 
and  able  to  meet  all  obligations.  A  meeting  of  the  cabinet 
was  held  on  June  30th,  at  which  the  increasing  number  of 
failures  and  suspensions  of  banks  and  the  paralysis  of  busi- 
ness were  fully  discussed,  and  the  President  determined  to 
summon  Congress  in  extra  session  on  the  7th  day  of  August. 
The  call  came  none  too  soon  but  did  little  to  stay  the  prog- 
ress of  the  panic.  Banking  institutions,  national,  state 
and  private,  were  daily  suspending;  depositors  were  with- 
drawing their  cash  from  the  banks  whenever  possible,  and 
industrial  enterprises  were  closing  down.  Twenty-five 
national  banks  suspended  in  June,  a  number  never  before 
exceeded  in  an  entire  year;  seventy-eight  suspended  in  July, 
and  thirty-eight  in  August.  The  collapse  of  private  and 
state  banks  was  even  more  alarming. 

For  some  years  the  United  States  had  been  trying  to  get 
united  action  by  the  nations  of  the  world  in  making  silver 


HISTORY  OP  BUSINESS  DEPRESSIONS  191 

the  universal  basis  of  money  by  free  coinage.  The  Inter- 
national Monetary  Conference  held  several  sessions  at  dif- 
ferent capitols,  but  in  no  case  was  an  agreement  reached. 
Italy,  France  and  Spain  had  formed  a  monetary  alliance 
known  as  the  Latin  Union,  which  was  able  to  maintain  the 
value  of  silver  at  a  fairly  uniform  price  retail.  Bismarck, 
then  Chancellor  of  Germany,  was  persuaded  to  the  demoneti- 
zation of  silver.  A  large  amount  of  the  metal  from  that 
country  was  then  thrown  into  the  Latin  Union  countries 
and  overflowed  into  the  United  States  in  great  abundance. 
The  European  countries  first  limited  their  coinage  of  silver 
and  finally  suspended  it.  This  put  the  price  down  to  its 
commercial  value  and  caused  consternation  in  the  United 
States,  where  it  naturally  depreciated. 

America  stood  almost  alone  for  bimetallic  coinage.  Just 
at  this  time  the  Indian  Currency  Committee  officially  an- 
nounced the  closing  of  the  mints  to  the  free  coinage  of 
silver.  This  news  of  the  action  of  the  British  Government 
caused  a  profound  sensation  in  the  United  States  and  in- 
creased the  tendency  to  unreasoning  panic.  After  a  hard 
fight  in  Congress,  in  which  party  lines  were  divided,  the 
Sherman  law  was  repealed.  The  business  public  accepted 
the  suspension  of  payments  without  complaint  and  certifi- 
cates were  gladly  taken  in  order  to  transact  what  business 
was  done. 

Flooding  the  country  with  the  immense  amount  of  paper 
money  authorized  in  1890  was  bound  to  lead  to  trouble. 
It  was  beginning  to  be  realized  then  that  the  previous 
stringency  in  1890  was  not  caused  by  lack  of  circulating 
currency  but  entirely  from  other  causes,  such  as  crop  failure, 
large  importation  of  foreign  goods,  causing  an  outflow  of 
gold,  and  too  much  money  tied  up  in  speculative  channels. 
Had  the  government  refrained  from  purchasing  silver  the 
national  banks  would  have  increased  their  circulation  up 
to  a  much  higher  point  and  the  situation  would  eventually 
have  been  relieved  on  a  sound  basis.  On  the  strength  of  the 


192  HISTORY  OF  BUSINESS  DEPRESSIONS 

large  amount  of  paper  money  issued  new  banks  were  rapidly 
organized. 

In  1892  one  hundred  and  sixty-three  new  national  banks 
commenced  business  with  a  capital  of  $15,285,000.  All  this 
was  the  forerunner  of  one  of  the  most  disastrous  panics  the 
country  ever  experienced.  Business  began  to  be  depressed 
because  of  the  prevailing  doubt  as  to  the  power  of  the  gov- 
ernment to  maintain  gold  payment  of  all  this  paper  money 
if  presented  for  redemption.  The  banks  themselves  were 
the  first  to  become  wary.  Back  of  it  all  there  was  really 
a  lack  of  confidence  in  the  Treasury.  Depositors  began 
withdrawing  money  in  specie  and  putting  it  away.  Practi- 
cally every  savings  bank  in  the  country  was  menaced  and 
for  a  few  months  it  was  not  thought  possible  that  even  the 
strongest  institutions  of  this  kind  could  weather  the  storm. 
Unemployment  was  so  general  that  withdrawals  were  made 
even  by  those  who  had  confidence  in  the  savings  banks. 
Fear  was  in  the  minds  of  the  people  that  we  might  fall  to 
a  silver  standard  because  of  our  low  gold  reserve  and  the 
large  ratio  of  silver  being  coined. 

An  idea  of  the  reduction  in  exchanges  caused  by  the  panic 
may  be  gathered  from  the  shrinkage  of  the  transactions  of 
the  New  York  Clearing  House  from  $34,421,380,870  for  the 
year  ending  October  1,  1893,  to  $24,230,145,368  for  the  year 
ending  October  1, 1894.  The  comparison  for  the  prosperous 
month  of  October,  1892,  with  the  same  month  in  1893, 
showed  a  shrinkage  in  the  clearing  transactions  of  the  lead- 
ing cities  of  the  United  States  from  $5,501,901,592  to  $4,- 
043,510,662.  The  clearings  throughout  the  leading  cities  of 
the  country  showed  a  shrinkage  from  $58,880,682,455  for  the 
year  ending  September  30,  1893,  which  included  a  part  of 
the  period  of  panic,  to  $45,017,960,736  for  the  year  ending 
September  30,  1894.  The  failures  throughout  the  country 
increased  from  10,270,  with  liabilities  of  $108,500,000  in 
1892  to  15,560,  with  liabilities  of  $402,400,000  in  1894. 

During  the  year  158  national  banks  suspended  business, 


HISTORY   OF   BUSINESS   DEPRESSIONS  193 

the  capital  stock  aggregating  $30,350,000.  In  all  the  large 
cities  clearing  houses  issued  certificates.  State  banks,  pri- 
vate banks  and  trust  companies  to  the  number  of  415  failed. 
A  careful  compilation  of  the  records  show  that  over  900 
banks  of  all  classes  were  in  difficulties.  A  portion  later 
reorganized  and  resumed.  Deposits  in  the  national  banks 
declined  in  a  few  months  from  $1,764,456,177  to  $1,451,- 
124,330.  The  net  earnings  of  the  national  banks  that  year 
was  only  5.6  per  cent,  with  two  exceptions,  that  of  1878  and 
1879,  the  lowest  on  record.  Banking  institutions  were  con- 
solidated in  many  cities  in  order  to  preserve  their  resources. 

July  26th  was  a  day  of  great  strain  in  New  York.  Kates 
for  money,  which  were  normal  in  the  morning,  rose  to  75 
per  cent  per  annum  before  the  close  of  business.  An  appeal 
was  then  made  to  London  and  $10,000,000  in  gold  was  en- 
gaged. By  August  5th  the  reserves  of  the  New  York  banks 
were  $14,000,000  below  the  limit. 

For  fourteen  years,  1878-1892,  only  an  insignificant 
amount  of  gold  was  paid  out  by  the  treasury  in  the  redemp- 
tion of  legal-tender  notes.  The  total  amount  of  gold  in  the 
treasury  increased  almost  steadily  and  continuously  from 
$140,000,000  on  January  1,  1879,  to  $300,000,000  in  1891. 
A  new  issue  of  treasury  notes  in  1890,  together  with  de- 
mands in  commercial  channels,  placed  heavy  burdens  upon 
the  reserve,  the  rapid  diminution  of  which  is  shown  in  the 
following  figures : 

Net  Gold 
Datt  Reserve 

June  30,  1890 $190,232,405 

June  30,  1891 117,667,723 

June  30,  1892 114,342,367 

June  30,  1893 95,485,413 

June  30,  1894  . 64,873,025 

The  reasons  of  the  fall  in  the  gold  reserve  are  various  and 
complicated,  but  among  them  might  be  given  the  withdrawal 
of  gold  by  Europe  following  the  Baring  failure,  the  hoarding 
of  gold  in  this  country  by  individuals,  and  its  purchase  by 
banks  who  feared  the  results  of  the  Silver  Purchase  Act. 


194  HISTORY   OF   BUSINESS   DEPRESSIONS 

"The  Treasury  had  been  weakened,"  explains  Dewey,  "by 
the  reluctance  of  Secretary  Windom  to  deposit  government 
funds  in  national  bank  depositories,  and  by  his  preference 
to  rely  entirely  upon  the  purchase  of  bonds  for  getting 
money  back  into  circulation.  In  the  earlier  years  of  Har- 
rison's administration  bonds  were  purchased  freely,  too 
generously  in  view  of  the  impending  strain  upon  the  re- 
sources of  the  treasury." 

The  failures  for  the  year  1893  are  given  in  this  table  and 
figures  for  the  year  1892,  a  normal  year,  are  given  by  way 
of  comparison: 

*MERCANTILE  AND  INDUSTRIAL  FAILURES  1892-93 

First  Second  Third  Fourth 

1893            Quarter  Quarter  Quarter  Quarter  Total 

Number 3,202  3,199  4,015  4,826  15,242 

Liabilities.  .  .47,338,300  121,582,539  82,470,040  95>389,oI°  346,779,889 
1892 

Number 3,384  2,119  1,984  2,857  l°,344 

Liabilities.  .  .39,284,349  22,989,331  18,659,235  33,111,252  114,044,167 

Bank  failures  are  given  below  as  shown  from  the  table 
compiled  by  the  Comptroller  of  the  Currency : 

BANKS,  ETC.,  WHICH  SUSPENDED,  JAN.  1  TO  SEPT.  1,  1898 

Class                    Number  Assets  Liabilities 

State     Banks 172  $41,281,848  $36,903,266 

Savings   Banks 47  17,673,938  16,830,809 

Loan  and  Trust  Cos.__      13  14,337,500  22,354,000 

Mortgage   Companies. _       6  760,803            1,790,000 

Private    Banks    177  20,237,259  19,315,455 


•415        $94,291,348        $97,193,530 

The  following  year,  1894,  really  saw  the  worst  of  this 
depression.  Great  poverty  existed  in  the  cities;  factories 
were  closed  and  distress  was  felt  everywhere.  The  Chemical 
National  Bank  of  Chicago,  with  a  capital  of  $1,000,000, 
closed  its  doors  on  May  9th,  and  was  followed  two  days 
later  by  the  Columbia  National  Bank  of  Chicago,  with  a 


*Figures  from  "The  Commercial  and  Financial  Chronicle." 


HISTORY  OF   BUSINESS   DEPRESSIONS  195 

capital  of  an  equal  sum.  The  Distillers  and  Cattle  Feeders 
Company  was  another  large  concern  which  was  involved, 
its  shares  falling  from  $70  to  nothing.  In  1893,  the  pro- 
portion of  loans  to  deposits  rose  to  about  109  per  cent,  and 
proportion  of  specie  to  loans  declined  to  13  per  cent.  The 
average  price  of  twenty  prominent  stocks  reached  about 
$47  per  share.  The  number  of  failures  for  the  year  ex- 
ceeded 15,000. 

*"Aggregate  liabilities  of  bankers  and  banking  insti- 
tutions in  the  United  States  failing  in  1893  and  the  two 
succeeding  years: 

1893  (year   of   crisis) $170,295,698 

1894  (year  of  depression) $13,969,950 

1895  (year  of  depression) 22,764,000 

Average  for  the  years  1894  and  1895 18,366,975 


Excess  in  1893  (year  of  crisis)  over  average 

for  1894  and  1895  (years  of  depression)      $151,928,723 

or  827  per  cent." 

""'Aggregate   liabilities    of    all    others,   including  mer- 
chants and  manufacturers: 

1893  (year  of  crisis) $231,704,322 

1894  (year  of  depression) __   $135,030,050 

1895  (year  of  depression)  __      136,236,000 

Average  for  the  years  1894  and  1895 135,633,025 


Excess  in  1893  over  average  for  1894  and 

1895 $  96,071,29T 

"Excess  of  liabilities  from  failures  of  merchants, 
manufacturers,  and  others  in  1893,  year  of  crisis, 
over  average  for  two  ensuing  years  of  depression* 
slightly  less  than  71  per  cent." 

"It  thus  appears  that  the  percentage  of  excess  of  liabili- 
ties in  the  crisis  year  over  the  average  for  the  two  succeed- 
ing years  of  depression  was  nearly  twelve  times  as  great 
(827  to  71)  in  banking  failures  as  in  mercantile,  manufac- 
turing, and  all  other  failures." 

This  revulsion  witnessed  the  distress  incident  to  a  finan- 
cial collapse  of  the  ordinary  type,  intensified  by  the  depletion 


*Figures  used  by  Burton. 


196  HISTORY  OF  BUSINESS  DEPRESSIONS 

of  the  gold  reserve  in  the  Treasury  and  the  perils  which 
threatened  even  the  gold  standard. 

The  range  of  leading  industrial  stocks  on  the  New  York 
Stock  Exchange  in  1893  is  shown  as  follows  :* 

Miscellaneous                          Opening  Lowest  Closing 

American   Sugar 111  61  July  26  81 

American  Tobacco  Co 121  43  July  31  70 

National    Cordage    138  7  Aug.  25  20 

Pacific  Mail  Steamship 27  8  July  27  14 

United  States  Rubber  Co 46  17  Aug.  17  42 

Western   Union   Tel.    Co 96  67  July  26  82 


*Figures  used  by  Lauck. 


CHAPTER  XXII 
THE  DEPRESSION  OF  1903 

The  year  1903  may  be  characterized  as  the  culmination  of 
that  long  period  of  prosperity  which  had  its  inception  In 
the  sound  money  triumph  in  the  presidential  election  of 
1896.  Wonderful  strides  had  been  made  by  the  nation  if 
we  may  judge  by  the  largest  three  industries.  The  iron  and 
steel  industry  was  never  so  busy,  the  railway  industry  was 
burdened  with  all  the  freight  that  it  could  handle,  while 
the  agricultural  interests  of  the  country  were  favored  by 
enormous  crops.  If  these  three  industries  are  a  reflector 
as  they  usually  are,  the  prosperity  of  the  nation  was  such 
as  to  stand  almost  without  a  parallel.  We  might  expect, 
therefore,  that  the  prices  for  securities  representing  large 
industrial  concerns  would  be  quoted  at  a  very  high  level. 
And  we  might  also  expect  a  reverse  in  the  upward  swing, 
characterized  by  conditions  in  the  stock  market  approxi- 
mating a  panic.  It  was  a  year  marked  by  fluctuations  in 
stocks.  In  a  single  day  Pennsylvania  Railroad  stock  was 
quoted  at  the  low  and  high  extreme  of  110%  to  157%. 

There  was  a  period  of  sharp  increase  in  money  values. 
All  stocks  lost  heavily  through  the  resulting  liquidation.  As 
the  speculative  period  had  apparently  ran  its  course  it  was 
to  be  a  year  generally  of  declining  prices  which  periodically 
comes,  at  which  times  weaker  stocks  suffer  and  com- 
panies are  often  taken  over  by  more  powerful  corporations. 
The  Northern  Securities  suit  of  that  year  undermined  confi- 
dence because  of  the  publicity  given  to  unsavory  financial 
methods.  The  shrinkage  in  the  value  of  stocks  was  so 
pronounced  and  so  continuous  that  it  may  be  said  to  have 
had  few,  if  any,  parallels  in  stock  exchange  history.  The 
extent  of  the  decline  may  be  understood  by  the  quotations  of 


198  HISTORY   OF   BUSINESS   DEPRESSIONS 

a  few  high  grade  stocks.  Pennsylvania  Railroad  stock 
dropped  in  January  from  128%  to  110%  in  November.  It 
again  rose  to  140  in  1904.  New  York  Central  fell  from  156 
in  January  to  112%  in  July.  It  again  rose  to  145  in  1904. 
Chicago  and  Northwestern  declined  from  224  V^  to  153  dur- 
ing the  year,  but  again  rose  to  214.  Union  Pacific  fell  from 
103%  to  653^  but  again  rose  to  117  in  1904. 

The  depression,  affecting  mostly  investors  and  specula- 
tors in  stocks,  started  through  the  collapse  of  large  corpora- 
tions which  had  been  over-inflated  and  watered  beyond 
reason.  Over  $6,000,000,000  worth  of  securities  had  been 
floated  in  the  few  years  preceding,  many  of  which  were  of 
questionable  value  but  which  were  bought  eagerly  by  the  in- 
vesting public  who  had  been  duped  with  stories  of  immense 
fortunes  having  been  made  in  industrial  lines,  the  out- 
standing example  of  which  was  Andrew  Carnegie.  The 
shipbuilding  trust,  as  it  was  called,  was  the  first  to  collapse, 
revealing  as  it  did  some  of  the  evils  of  high  finance  which 
permeated  the  period.  Disillusioned  investors  threw  every 
kind  of  stock  on  the  market,  resulting  in  severe  declines  and 
a  reaction  of  public  sentiment  against  industrial  stocks. 
This  followed  the  day  of  rapid  organization  of  trusts  and 
combinations.  One  hundred  and  eighty-five  had  been 
formed  within  a  few  years  of  this  time,  taking  in  from 
four  to  as  high  as  forty  plants  in  a  given  industry  with  a 
total  capitalization  of  $1,436,625,910.  Some  of  them  did 
not  meet  with  the  success  that  was  anticipated  and  these 
followed  the  shipbuilding  trust  in  collapse,  due  to  over  capi- 
talization and  stringency  in  the  money  market. 

The  barometer,  as  indicated  by  the  iron  trade,  was  still 
rising  at  the  opening  of  1903.  Good  crops  had  been  gathered 
and  were  being  sold  at  good  prices ;  railway  earnings  were 
large,  and  railway  companies  were  making  heavy  expendi- 
tures for  new  equipment  and  improvements,  and  every  de- 
partment of  business  and  manufacturing  industry  seemed 
prosperous.  So  heavy,  indeed,  was  the  demand  for  iron  and 


HISTORY  OF  BUSINESS   DEPRESSIONS  199 

steel  that  the  capacity  of  the  plants  was  unequal  to  it,  and 
we  were  importing  iron  and  steel  to  some  extent,  as  we  had 
been  in  1902.  Then  in  June  the  iron  industry  experienced 
one  of  its  well-known  quick  changes.  The  figures  suddenly 
registered  a  severe  drop.  The  demand  subsided  with  sur- 
prising celerity  in  all  lines,  and  by  November  prices  in  some 
lines  were  50  per  cent  lower  than  in  January.  The  boom  in 
the  iron  trade  which  commenced  in  1899  was  at  an  end. 

Before  the  end  of  1903  liquidation  on  a  large  scale  in 
stocks  had  run  its  course  and  exhausted  itself,  and  the 
market  quieted  into  comparative  steadiness. 

In  this  same  year  Canada  made  material  progress,  more 
so  than  in  any  previous  year  of  her  history;  money  was 
plentiful,  crops  good,  and  150,000  emigrants  had  entered 
the  Dominion. 

The  depression  affected  the  United  States  Steel  Corpora- 
tion to  such  an  extent  that,  for  the  first  instance  in  its  his- 
tory up  to  that  time,  the  wages  of  the  men  employed  in  the 
plants  were  reduced.  Gross  sales  for  the  year  were  only 
$444,405,431,  and  net  profits  $73,176,522.  No  special  ap- 
propriation for  new  construction  was  made  and,  despite 
the  small  profits,  the  corporation  managed  to  show  a  sur- 
plus of  $5,047,852  after  the  payment  of  the  full  preferred 
dividend. 

Bank  clearings  showed  a  reduction  of  $9,000,000,000  as 
against  the  previous  year.  During  this  period  several  bills 
were  introduced  in  both  houses  of  Congress  aimed  at  cor- 
recting the  financial  system  so  as  to  avoid  recurrence  of 
crises. 

At  this  time  we  heard  the  first  serious  discussion  on  the 
question  of  taking  the  center  of  the  national  finance  away 
from  Wall  Street  and  establishing  reserve  cities  so  as  to 
distribute  financial  centers  throughout  the  country. 


CHAPTER  XXIII 
THE  DEPRESSION  OF  1907-08 

This  depression  followed  a  financial  panic  which  broke  in 
November,  1907,  almost  without  warning.  The  business  de- 
pression following  it  was  of  comparatively  short  duration, 
lasting  only  through  1908,  or  about  fifteen  months.  The 
crisis  proved  to  be  a  blessing  in  disguise,  as  it  demonstrated 
the  weakness  of  our  financial  system  and  awakened  us  to 
the  need  of  urgent  action,  finally  bringing  about  the  pas- 
sage of  the  Federal  Reserve  Act.  The  causes  of  the  dis- 
turbance were  the  weak  financial  system  and  unrestrained 
speculation,  although  a  number  of  other  theories  have  been 
advanced.  On  the  whole  there  had  not  been  extensive  over- 
production or  construction  work  beyond  immediate  needs. 
Neither  was  there  undue  inflation  in  real  estate  values. 

On  the  surface  the  events  of  1907  were  more  startling, 
more  spectacular  and  more  unexpected  than  the  events  of 
either  1873  or  1893.  No  word  had  gone  out  to  the  public 
about  dangerous  underlying  conditions  that  existed  in  the 
financial  world.  Since  the  facts  have  come  to  light,  the 
crisis  that  was  developing  during  the  whole  of  that  year  has 
become  known  as  the  "silent  panic." 

This  panic  would  have  broken  in  March,  1907,  had  it  not 
been  for  prompt  relief  from  Washington.  Previous  months 
had  witnessed  high  tension  in  the  financial  center.  Call 
money  in  December,  1906,  commanded  from  9  to  15  per 
cent.  During  a  few  days  in  January  as  high  as  50  per  cent 
was  paid  for  call  money.  By  March  the  situation  had  be- 
come so  bad  that  the  banks  were  forced  to  call  loans,  and 
securities  dropped  in  a  single  day  five  to  twenty-five  points. 
General  prosperity  ruled  throughout  the  country  and  there 
seemed  to  be  no  fear  on  the  part  of  the  public  of  an  impend- 


HISTORY   OF  BUSINESS   DEPRESSIONS  201 

ing  disaster.  Relief  measures  taken  at  Washington  rem- 
edied matters  somewhat  and  had  proper  precautions  been 
taken  perhaps  the  panic  which  came  in  the  fall  could  have 
been  averted.  However,  everybody  was  making  money, 
sales  were  good,  bank  clearing  the  highest  on  record,  and 
nobody  wished  a  halt  in  the  good  times.  Those  with  their 
ear  to  the  ground  saw,  however,  that  inevitably  something 
must  happen. 

Financial  leaders  should  have  demanded  a  gradual  con- 
traction, or  at  least  no  further  expansion,  confining  loans 
to  what  were  absolutely  necessary  to  protect  the  solvency  of 
the  borrowers.  But  the  banks  apparently  went  ahead  un- 
checked, and  when  the  emergency  came  they  called  on  the 
treasury  as  they  were  in  the  habit  of  doing.  In  May  of  that 
year  the  banks  called  for  help  and  again  in  August,  when 
additional  relief  was  rendered,  but  all  this  did  not  suffice. 
It  left  the  ever  increasing  weight  of  obligation  still  on  the 
banks,  and  when  rumors  of  the  weakness  of  certain  banks 
persisted  runs  started  and  the  crash  came. 

It  is  now  conceded  that  the  officials  at  Washington  made 
a  mistake.  Instead  of  calling  attention  to  the  capital  weak- 
ness of  the  banks,  the  Government  permitted  them  to  con- 
tinue to  use  the  large  treasury  balance  without  interest. 

It  was  a  period  of  confidence,  large  crops  and  ample 
business.  All  the  leading  influences  contributed  to  make  it 
a  period  of  unexampled  activity.  The  railway  industry  and 
the  iron  and  steel  industry  were  favored  to  an  exceptional 
degree. 

Bank  clearings  in  New  York  were  $29,350,894,000  in  1896 
and  increased  in  1907  to  $95,315,441,000,  and  for  the  entire 
country  the  increase  was  from  $51,935,651,000  in  1896  to 
$154,662,515,000  in  1907.  The  volume  of  money  in  circu- 
lation rose  from  $1,506,434,966  in  1896  to  $2,772,956,455 
in  1907.  In  the  five  years  from  1903  to  1907,  inclusive,  the 
world's  output  of  gold  was  $1,855,421,300.  The  country 
made  rapid  strides  in  every  line — agriculture,  manufactur- 


202  HISTORY  OF  BUSINESS  DEPRESSIONS 

ing,  banking,  etc.  Par  value  of  outstanding  securities  in 
the  United  States  in  1905  totaled  $35,000,000,000.  Money 
rates  continued  reasonably  low  until  the  latter  part  of  Sep- 
tember. The  activity  and  tremendous  rise  in  prices  which 
marked  the  year  1904  were  hardly  a  circumstance  to  the 
extraordinary  buoyancy  and  unrestricted  optimism  that  de- 
veloped in  1905,  '06  and  '07.  As  the  Commercial  and  Finan- 
cial Chronicle  stated : 

"Unfavorable  developments  were  completely  ig- 
nored and  favorable  features  long  seemed  to  count, 
yet  this  year  was  marked  by  some  very  severe 
breaks  subject,  however,  to  almost  immediate  re- 
covery. Thus  in  January  there  were  rumors  of  an 
early  settlement  between  the  Harriman  and  Hill 
factions.  There  were  also  rumors  concerning  a 
combination  of  the  Union  Pacific,  Standard  Oil, 
and  Vanderbilt  interests.  Largely  because  of  these 
rumors,  and  other  circumstances,  the  price  of 
Great  Northern  jumped  from  236  to  254.  Northern 
Securities  rose  from  113  to  123.  As  a  matter  of 
fact,  nothing  came  of  all  these  rumors  except  that 
there  were  some  changes  on  the  directorates  of 
these  corporations  which  made  for  greater  uni- 
formity of  management.  Yet  in  spite  of  these 
conditions  the  last  few  days  of  the  year  showed 
a  tremendous  decline  in  the  value  of  almost  the 
whole  list  of  securities,  and  the  market  on  the 
closing  day  of  the  year  was  practically  on  the 
verge  of  a  panic.  Great  Northern  dropped  from 
335  to  270;  Union  Pacific  from  137  to  118;  New 
York  Central  from  163  to  141 ;  Milwaukee  and  St. 
Paul  from  187  to  170 ;  Ontario  and  Western  from 
63  to  49  and  Pennsylvania  Railroad  from  144  to 
137." 

This  decline  in  the  value  of  these  securities  while  theii 
earning  power  continued  undiminished — and  the  condition 
of  their  business  was  as  favorable  as  could  be  desired — 
serves  as  an  illustration  of  the  eifect  of  extraneous  forces 
upon  the  security  market. 


HISTORY   OF   BUSINESS   DEPRESSIONS  203 

Amalgamated  Copper  took  a  turn  downward  in  the  sum- 
mer, thence  leading  up  to  the  fall  crash.  Steel  and  other 
stocks  were  moving  down  without  any  apparent  cause. 
Lord  Rothschild  gave  an  interview  in  London,  which,  coming 
from  the  source  it  did,  was  ominous.  He  said  New  York 
was  hoarding  money.  Apparently,  it  was  the  insiders  who 
were  selling  and  holding  the  money  in  order  to  buy  back 
cheaply.  This  feature  has  been  referred  to  as  the  "Con- 
spiracy of  1907."  Alvin  S.  Brown,  a  New  York  man,  issued 
a  pamphlet  of  that  title ;  he  gathered  in  a  unique  collection  of 
clearing  house  certificates  issued  in  various  cities  in  the 
United  States. 

The  reversal  came  quickly  and  dramatically.  Starting  in 
November  it  overwhelmed  banks  and  industrial  corpora- 
tions, the  most  important  of  which  was  the  Tennessee  Coal 
and  Iron  Company.  The  Morgan  interests  seized  this  op- 
portunity to  take  the  property  over  as  a  part  of  the  United 
States  Steel  Corporation.  This  was  the  most  important  in- 
stance of  a  tendency  that  had  sprung  up  during  recent  de- 
pressions of  powerful  corporations  to  absorb  the  weak. 
That  does  not,  of  course,  mean  that  large  corporate  interests 
have  any  great  liking  for  depressions.  Rather,  they  have  a 
great  deal  to  fear  because  of  the  heavy  overhead  involved 
in  keeping  the  many  plants  in  running  condition,  thus  tax- 
ing their  resources  to  the  limit.  Corporations  that  are 
sound  and  have  strong  banking  connections  weather  these 
periods  and  even  take  over  their  smaller  competitors,  but 
an  independent  plant,  if  in  sound  financial  condition,  and 
properly  managed,  has  the  advantage  in  years  of  depression 
because  it  is  able  to  more  quickly  and  effectively  curtail  ex- 
penditures. Large  companies,  commonly  known  as  trusts, 
have  a  further  disadvantage  in  that  they  are  looked  to  in 
setting  the  market  prices  of  the  commodity  they  control. 
With  large  stocks  on  hand  they  are  not  able  to  make  the 
quick  reductions  necessary  to  stimulate  business  in  times  of 
depression,  because  of  the  loss  they  would  have  to  take  which 


204  HISTORY   OF  BUSINESS   DEPRESSIONS 

would  often  weaken  them  and  bring  their  finances  to  an  un- 
stable condition. 

These  corporations  invariably  make  worse  rather  than  im- 
prove depressed  periods  by  draining  the  resources  of  the 
financial  world.  Unless  they  followed  this  practice  they 
would  be  forced  into  bankruptcy,  with  its  attendant  ruin, 
so  that  it  is  necessary  to  sustain  them  until  they  can  de- 
crease their  stocks  and  readjust  their  costs.  On  the  other 
hand,  small  independent  concerns  do  not  require  such  large 
financing  and  are  more  able  to  make  a  quick  readjustment. 
These  corporations  have  banking  institutions  closely  affili- 
ated with  them  in  order  to  protect  them  when  no  call  money 
is  to  be  had.  Sometimes  the  resources  of  the  banks  are 
strained  to  support  the  large  corporations,  so  that  the  aver- 
age business  man  and  investor  is  without  resources  to  tide 
him  over.  This  was  the  case  in  the  depression  of  1907  and 
'08. 

This  panic  has  been  called  the  "rich  man's  panic".  A 
writer  who  lived  in  the  day  of  the  Great  Chief,  and  was 
probably  numbered  among  his  enemies,  has  attempted  to 
brand  it  as  the  "Roosevelt  Panic."  Still  another  even  goes 
so  far  as  to  record  on  the  sacred  pages  of  history  the  state- 
ment that  Roosevelt's  speeches  were  the  main  and  principal 
cause  of  the  panic  and  depression.  What  "malefactor  of 
great  wealth"  this  writer  was  interested  in  is  not  known ! 

Adolph  Edwards,  a  long  forgotten  writer,  wrote  a  book 
entitled  "The  Roosevelt  Panic  of  1907,"  in  which  he  started 
off  thusly :  "In  the  course  of  time  a  man  in  clerical  garb  will 
stand  before  the  earthly  remains  of  Theodore  Roosevelt 
and  repeat  the  familiar  words,  'Dust  to  dust  and  ashes  to 
ashes,'  and  the  gaping  multitude  will  look  on,  as  it  always 
does,  dumb,  stolid  and  unflinching,  before  the  last  and 
greatest  mystery  of  human  existence.  'The  evil  that  men 
do  lives  after  them,'  and  the  unmoved  and  inexorable  his- 
torian shall  submit  to  the  judgment  of  unborn  masses  the 
record  of  the  achievements  of  this  unique  figure  in  the  an- 


HISTORY   OF  BUSINESS   DEPRESSIONS  205 

nals  of  American  history.  The  ruin  he  may  have  caused, 
the  homes  he  may  have  wrecked,  the  unspeakable  misery  of 
want  and  starvation,  or  the  dread  of  them  he  may  have 
inflicted,  the  reckless  blunders,  the  wanton  lack  of  judgment 
and  deliberation,  of  which  a  nation  of  eighty  millon,  nay, 
the  whole  world,  has  suffered  the  inevitable  consequences 
— all  this  shall  be  written,  not  in  the  heat  of  passion  or  under 
stress  of  suffering,  but  coldly  and  with  relentless  delibera- 
tion." 

Fourteen  years  have  passed  since  this  was  written  and 
Theodore  Roosevelt  has  passed  on,  but  even  after  this  short 
space  of  time  no  living  soul  would  hold  him  responsible  for 
the  panic  of  1907.  Yet,  at  the  time,  there  were  thousands 
who,  probably  conscientiously,  held  the  opinion  of  the  author 
quoted. 

It  was  fashionable  in  those  days  to  blame  Roosevelt  for 
everything,  and  some  scored  him  who  now  are  haunted 
by  their  words.  Had  President  Roosevelt  not  taken  the 
bold  stand  he  did  against  the  flagrant  abuses  of  those  times 
we  would  have  had  a  worse  day  of  reckoning  than  we  did 
in  1907.  Roosevelt  saw  plainly  where  those  practices  were 
leading  us  and  he  knew  that  there  had  to  come  a  shock  in 
facing  it,  at  one  time  or  another,  and  he  must  be  given 
credit  for  having  the  courage  to  face  it  himself  and  not 
leave  it  over  to  his  successor.  As  time  goes  on  we  see  that 
his  course  was  timely  and  providential. 

Attorney  General  Bonaparte  facetiously  said  "that  there 
was  a  fine  covey  of  game  among  the  large  capitalists  in 
control  of  corporations,  and  that  it  would  be  a  poor  marks- 
man who  would  not  bring  some  of  the  birds  down."  All  of 
this  had  the  wrong-doers  in  a  very  nervous  state.  However 
true  it  was  that  the  panic  was  a  "rich  man's  panic,"  it  af- 
fected seriously  the  business  of  the  whole  country  and  some 
claim  that  we  did  not  fully  recover  until  the  World  War.  It  is 
true  that  we  did  not  have  any  further  boom  times,  but  1909 
was  a  normal  year  according  to  all  statistics,  and  normal 


206  HISTORY  OF  BUSINESS   DEPRESSIONS 

years  continued  with  the  exception  of  the  depression  of 
1914-15. 

The  insurance  scandal  unearthed  by  the  Hughes  investi- 
gation had  already  undermined  confidence  in  the  financial 
structure.  Coman  gives  this  as  the  cause  of  the  general 
weakness  of  American  financial  organizations:  "Undoubt- 
edly, the  antics  of  the  big  people  caused  investors  to  be  wary, 
with  the  result  that  the  corporations  were  not  able  to  market 
securities  readily  and  resorted  to  the  heavy  use  of  their 
borrowing  power,  thus  draining  the  money  market,  so  that 
ordinary  concerns  who  were  in  pressing  need  were  driven 
to  failure."  When  New  York  banks  found  difficulty  facing 
them,  particularly  the  Carnegie  Trust  Company,  with  which, 
incidentally,  Andrew  Carnegie  had  no  connection,  they  were 
unable  to  obtain  immediate  help  because  of  already  lowered 
reserves  in  other  institutions. 

As  that  disaster  was  well  within  the  memory  of  most  of 
us  now  living,  what  can  be  said  here  will  be  taken  only  as 
the  opinion  of  an  individual.  Others  might  have  a  different 
diagnosis.  It  is  known  that  the  match  that  lit  the  confla- 
gration was  the  single  incident  of  a  scandalous  bank  failure 
at  the  opportune  time,  when  a  slowing  up  was  very  much 
desired,  if  not  past  due.  When  the  first  bank  failure  came 
along  it  caused  other  banks  to  call  loans  and  a  contraction 
resulted  in  general  fright.  After  it  was  under  way  the 
enemies  of  Roosevelt  who  swarmed  from  Wall  Street  and 
from  other  high  places  quickly  seized  the  opportunity  to 
"wrap  the  child  in  their  own  soiled  garments  and  lay  it  on 
Roosevelt's  doorstep."  Three  great  trust  companies  of 
New  York  failed,  bringing  fear  and  distrust  into  the  minds 
of  the  people  throughout  the  country.  Clearing  house  script 
was  in  vogue  in  all  large  cities.  Laws  were  quickly  passed 
by  legislatures  in  session  allowing  savings  banks  as  much  as 
sixty  days'  time  in  meeting  withdrawals.  Agricultural  dis- 
tricts were  not  affected  so  much,  since  the  depression  was 


HISTORY  OF   BUSINESS   DEPRESSIONS  207 

quickly  over,  and  the  end  of  1908  found  the  country  ap- 
approaching  normalcy. 

"In  1890,  according  to  statistics  compiled  by  the  director 
of  the  mint,  the  world's  supply  of  gold  available  for  momen- 
tary use  was  less  than  $4,000,000,000.  In  1907  it  exceeded 
$7,000,000,000.  At  the  same  time,  based  upon  this  gold, 
there  was  a  gigantic  expansion  of  banking  credit.  In  the 
United  States  bank  deposits  (including  those  of  savings 
banks)  increased  between  1890  and  1907  from  $6,000,000,- 
000  to  $19,000,000,000,  and  practically  all  of  this  expansion 
took  place  after  1897.  According  to  compuations  made  by 
the  Comptroller  of  the  Currency  the  item  of  individual  de- 
posits in  national  and  state  banks  increased  from  $7,000,- 
000,000  in  1900  to  $13,000,000,000  in  1907.  During  the 
same  period — the  advance  beginning  in  1897  and  ending  in 
January,  1907 — the  average  prices  of  commodities  in  gold- 
standard  countries  rose  some  40  per  cent.  In  the  stock 
market  the  upward  movement  of  prices  during  those  ten 
years  was  still  greater.  According  to  computations  made  by 
Mr.  James  H.  Brookmire,  of  St.  Louis,  who  bases  his  calcu- 
lations on  the  quotations  of  twenty  representative  railroad 
stocks,  the  lowest  point  was  touched  in  December,  1896, 
when  the  average  price  was  41.  From  then  until  the  end  of 
the  Boer  War  in  1902  there  was  an  irregular  advance  to  130. 
In  the  Fall  of  1902  began  a  decline  in  stocks  which  continued 
until  September,  1903,  the  lowest  point  which  these  stocks 
touched  being  88.  Then  began  a  more  rapid  upward  move- 
ment continuing  through  1904  and  1905,  the  highest  point, 
138,  being  reached  in  January,  1906.  Throughout  1906  the 
prices  of  these  stocks  barely  held  their  own.  A  rapid  down- 
ward movement  began  in  January,  1907,  until  in  March 
they  touched  98;  then  they  advanced  until  July,  when  a 
decline  began  which  finally  carried  them  during  the  October 
panic  down  to  the  lowest  point  of  82." 

"It  is  very  difficult  to  escape  the  conclusion  that  all  this 
advance  of  prices  and  expansion  of  credit  must  in  the  main 
be  attributed  to  the  great  increase  in  the  world's  stock  of 
gold.  This  prosperous  decade  had  much  more  than  its  share 
of  untoward  events  which  were  calculated  to  restrict  enter- 
prises and  hold  credit  in  check.  There  were,  for  instance, 
our  own  war  with  Spain  in  1898,  England's  war  against  the 
Boers  in  1900  and  1901,  the  Russo-Japanese  War  and  in 


208  HISTORY   OF  BUSINESS   DEPRESSIONS 

1904  and  1905,  the  anthracite  coal  strike  in  1902,  and  the 
Baltimore  and  San  Francisco  conflagrations.  Despite  these 
events  and  others  of  a  similar  character,  which  tended  to 
waste  capital  and  destroy  the  confidence  of  conservative 
men  in  the  business  outlook,  the  tide  of  prosperity  rolled  on 
almost  without  check  until  the  beginning  of  1907,  prices 
advancing,  the  stock  market  booming,  bank  clearances 
swelling,  the  average  man  convinced  that  good  times,  being 
deeply  rooted  in  natural  conditions,  would  persist  so  long  as 
the  sun  shone  and  the  rains  fell.  This  prosperity  was  by 
no  means  confined  to  the  United  States.  It  existed  in 
Canada  on  the  same  scale  as  here,  and  in  a  lesser  degree 
throughout  Europe  and  in  the  countries  of  South  America, 
in  which  large  sums  of  European  capital  were  invested.  For 
example,  the  loans  of  Canadian  banks  rose  from  $225,000,- 
000  in  1896  to  $712,000,000  in  1907.  The  total  bank  clear- 
ings of  the  United  States  increased  from  $51,000,000,000  in 
1896  to  $160,000,000,000  in  1906 ;  clearings  at  London  rose 
from  £7,500,000,000  to  nearly  £13,000,000,000,  and  the  Paris 
clearing  from  7,000,000,000  to  nearly  18,000,000,000  francs. 

"In  1897  prime  commercial  paper  sold  in  New  York  City 
at  from  3  to  31/2  per  cent.  In  1904  it  sold  at  from  4  to  5  per 
cent.  In  1906  and  1907  the  rate  was  often  7  per  cent  and 
the  average  was  fully  6  per  cent.  The  bank  of  England,  ex- 
cept for  brief  intervals,  has  maintained  rates  ranging  from 
4  to  6  per  cent  for  the  ten  years,  but  finally  in  1907  it 
advanced  its  rate,  as  the  result  of  the  panic  in  the  United 
States,  to  7  per  cent.  The  rates  of  interest  at  other  Eu- 
ropean financial  centers  were  correspondingly  high.  The 
most  spectacular  evidence  of  the  shortage  of  investment 
money  in  Great  Britain  was  furnished  by  the  decline  of 
consols  to  83."* 

General  speculation  was  the  order  of  the  day,  and  when 
the  year  1907  opened  it  was  apparent  among  far-sighted 
financiers  and  business  men  that  inflation  had  been  carried 
to  extremes  and  conservatism  must  prevail  to  avoid  serious 
difficulties,  but  the  public  would  not  have  it  that  way.  In 
the  early  part  of  1907  old  time  traveling  salesmen  said 
they  never  had  such  a  bonanza ;  everybody  bought  liberally. 
To  those  who  did  not  have  their  fingers  on  the  pulse  of  the 


Quoting  Laughlin. 


HISTORY  OF  BUSINESS  DEPRESSIONS  209 

economic  situation  it  looked  like  the  good  times  would  con- 
tinue perpetually.  The  short  collapse  in  the  stock  market 
in  March  only  caused  the  rest  of  the  country  to  sit  back  and 
grin.  They  saw  no  trouble  ahead  and  felt  secure  against 
the  evil  influence  of  Wall  Street. 

The  year  before  the  United  States  Treasury  held  $816,- 
354,352  in  gold,  the  largest  amount  held  up  to  that  time  by 
any  government  or  institution  in  the  world.  Other  causes 
advanced  for  the  panic  were  the  agitation  against  the  rail- 
roads and  the  decision  of  Judge  Landis  against  the  Standard 
Oil  Company,  inflicting  a  fine  of  $29,000,240,  which  fright- 
ened capitalists  and  investors.  The  speculators  became  ex- 
cited and  reasoned  that  if  one  corporation  could  be  fined 
$29,000,000  there  might  be  no  end  to  it  and  bring  ruin  to 
many.  With  this  idea  they  outdid  each  other  in  selling  their 
holdings.  Some  claim  the  financial  stringency  was  caused 
by  the  San  Francisco  earthquake,  which  took  $350,000,000 
out  of  the  money  market  in  order  to  pay  the  losses.  There 
was  also  the  revelation  of  scandals  in  the  life  insurance 
business  by  the  Hughes  investigations,  and  the  New  York 
State  Utilities  Bill  which  caused  street  railroad  stock  of 
New  York  City  to  fall  from  $127  to  $20  per  share,  playing 
havoc  among  investors  in  New  York  City.  The  connection  of 
these  corporations  with  some  of  the  picturesque  but  unsav- 
ory incidents  of  then  recent  Wall  Street  history  caused 
uneasiness  in  powerful  circles.  In  addition  it  was  felt  that 
the  complete  reorganization  of  the  insurance  companies  was 
inevitable,  that  restrictive  legislation  would  follow  which 
would  prevent  them  from  participating  to  the  same  degree 
in  underwriting  operations,  and  that  it  was  within  the  range 
of  possibility  that  they  might  be  forced  to  sell  large  quanti- 
ties of  securities  which  they  had  in  their  possession,  which 
were  also  held  to  a  large  extent  by  speculative  interests. 
Probably  no  one  of  these  caused  the  panic,  but  rather  a  com- 
bination of  all  of  them. 

Business  had  reached  a  high  water  mark  and  the  country's 


210  HISTORY  OF  BUSINESS   DEPRESSIONS 

currency  had  been  stretched  to  the  last  point.  A  contrac- 
tion was  due,  and  there  was  little  doubt  that  there  would 
have  a  business  depression  in  1908  even  if  the  panic  of  1907 
had  been  averted.  Probably  the  first  failure  was  the  Heinze 
crash  which  involved  the  United  Copper  which  F.  A.  Heinze 
controlled.  Commercial  failures  increased  60  per  cent  the 
last  few  months  of  1907  and  early  in  1908.  Money  had  been 
overused.  Interest  rates  were  extremely  high  and  failures 
were  frequent  everywhere.  The  Westinghouse  companies  of 
Pittsburg  were  placed  in  the  hands  of  receivers  for  inability 
to  meet  maturing  obligations.  The  exchanges  of  the  country 
were  thrown  out  of  joint.  On  October  29  Chicago  drafts  on 
New  York  were  quoted  at  $2.50  per  $1,000  discount.  In 
other  places  the  usual  country  balances  in  New  York  had 
been  so  far  drawn  down  that  the  banks  in  the  interior, 
although  having  plenty  of  cash  in  hand,  could  not  sell  drafts 
on  New  York  at  all.  Most  of  the  cotton,  woolen  and  other 
mills  of  New  England  and  the  East  shut  down  for  a  period 
or  ran  on  part  time  only. 

In  several  western  states  holidays  were  declared  by  the 
authorities  in  order  to  give  the  banks  a  breathing  spell 
and  allay  distrust.  Between  October  and  December  $100,- 
000,000,000  in  gold  was  imported  from  abroad  which  fil- 
tered through  New  York  to  all  parts  of  the  country.  Ar- 
rangements were  started  to  secure  gold  from  the  Bank  of 
France,  but  the  French  Bank,  when  approached  in  behalf 
of  America,  responded  that  as  there  was  no  central  bank  in 
America  similar  to  the  Bank  of  England,  it  would  be  glad 
to  help,  but  through  the  United  States  Treasury,  which 
could  not  be  done. 

Our  exports  had  fallen  off  that  year.  Europe  wanted 
nothing  but  our  gold  because  they  were  overstocked  with 
goods  themselves.  England  was  suffering  from  the  result 
of  the  Boer  War  and  her  consols  sold  as  low  as  81,  the  lowest 
price  since  1848.  Germany  was  particularly  overstocked 
and  the  Berlin  stock  market  was  going  through  a  depression 


HISTORY   OF   BUSINESS   DEPRESSIONS  211 

of  its  own.  Even  the  city  of  New  York  was  embarrassed 
in  placing  a  new  issue  of  municipal  bonds.  Abroad  there 
were  abundant  evidences  of  difficulty,  extending  to  Egypt, 
Japan,  and  Chili.  Some  bourbon  English  writers  attributed 
the  stringency  of  money  in  England  in  1907  to  the  "labor 
socialistic"  government  under  Lloyd  George,  whom  they 
called  a  "fresh  up-start."  Interest  rates  were  higher  all 
that  year  all  over  the  world ;  there  was  not  an  easy  money 
market  anywhere  and  4  per  cent  issues  could  not  be  market- 
ed in  any  country.  The  trust  companies  had  been  making  in- 
roads on  the  business  of  the  national  banks,  thus  weakening 
the  national  banking  system.  It  was  the  trust  companies, 
which  had  extended  their  business  to  commercial  banking, 
that  engaged  in  operations  far  beyond  the  limit  of  conserva- 
tive practice.  They  particularly  did  not  protect  their  de- 
posits by  adequate  reserves. 

Our  neighbors  in  Canada  avoided  the  worst  of  the  cata- 
clysm, probably  because  they  had  a  better  banking  and 
credit  system.  Canada  has  often  had  trade  declines  and 
depressions,  but  seldom  has  she  been  involved  in  panics. 
With  bad  crop  conditions  in  1907  and  stringent  money  she 
faced  difficulties.  At  the  grain  growers'  appeal  for  assist- 
ance the  Government  finally  decided  to  exceed  her  legal 
minimum  of  note  issues  in  order  to  place  currency  at  the 
command  of  the  farmers.  This  plan  carried  them  through 
the  depression  without  serious  consequences. 

The  crisis  of  1907  was  much  less  prolific  in  bank  failures 
than  its  larger  predecessors.  The  reference  to  the  "Rich 
Man's  Panic"  is  largely  true,  because  at  that  time  the  sav- 
ings banks  were  full  of  money  and  the  average  citizen 
throughout  the  country  was  fairly  well  fixed.  One  New 
York  City  institution,  the  Bowery  Savings  Bank,  held  over 
$100,000,000  of  deposits.  Wall  Street  capitalists  no  doubt 
envied  their  poor  brethren  who  possessed  this  cash.  The  fol- 
lowing year,  1908,  history  repeated  itself;  money  accumu- 
lated in  the  banks,  interest  rates  fell,  and  securities  steadily 


212  HISTORY   OF  BUSINESS   DEPRESSIONS 

advanced.  In  all  leading  commercial  countries  industrial 
revival  quickly  proved  that  the  catastrophe,  although  se- 
vere while  it  lasted,  was  of  shorter  duration  than  previous 
ones. 

The  banks  of  the  country,  New  York  particularly,  took  a 
wise  course,  making  necessary  loans  liberally  where  urgent 
and  furnishing  funds  to  other  parts  of  the  country.  The 
week  ending  November  9th  saw  their  lawful  reserves  de- 
clined $51,000,000  below  the  legal  limit.  But  imports  of 
gold  were  flowing  in  to  take  their  place. 

At  the  height  of  the  crisis  rumors  spread  that  the  Trust 
Company  of  America  was  in  difficulties.  This  institution 
had  a  capital  of  $3,000,000  and  resources  of  $74,000,000, 
including  $12,000,000  cash  in  its  vaults  at  the  time.  Under 
normal  conditions  it  was  perfectly  solvent  and  able  to  meet 
its  depositors'  claims,  but  that  it  was  not  in  position  to 
withstand  a  prolonged  run  was  proved  by  subsequent 
events.  Realizing  that  the  failure  of  the  Trust  Company 
of  America  would  make  the  crisis  far  more  acute,  Mr.  Mor- 
gan and  his  associates  resolved  to  come  to  its  assistance, 
provided  it  could  prove  that  its  statement  of  conditions 
were  correct. 

A  contemporary  describes  the  scene  as  follows :  "In  vain 
did  the  officers  of  the  company  put  seven  tellers  to  work 
instead  of  the  usual  one,  in  vain  were  all  deposits  paid 
promptly  and  unhesitatingly.  Denser  and  denser  grew  the 
crowd  of  depositors,  and  it  became  obvious  that  the  millions 
that  had  been  passed  over  the  counters  m  the  morning  hours 
would  not  suffice  to  stem  the  tide.  Thorne  hurried  over  to 
the  Morgan  offices  and  there  succeeded  in  obtaining  $2,- 
500,000  immediately.  This  loan  was  subsequently  augmented 
by  another  of  $10,000,000  made  a  few  days  later  and  a  third 
of  $15,000,000  made  early  in  November.  On  this  one  day, 
October  23rd,  $13,500,000  was  paid  out  over  the  trust  com- 
pany's counters !  But  this  was  not  enough  to  stem  the  run. 
As  near  as  can  be  estimated  something  between  $30,000,- 


HISTORY  OF  BUSINESS   DEPRESSIONS  213 

000  and  $35,000,000  was  paid  to  depositors.  But  the  Trust 
Company  of  America  was  saved.  It  has  been  claimed  that 
the  price  of  its  salvation  was  the  surrender  by  its  president 
of  some  5,500  shares  of  Tennessee  Coal,  Iron  and  Railroad 
stock  which  he  owned. 

"The  whole  financial  community  had  turned  to  Morgan 
as  its  Joshua  to  lead  it  out  of  the  desert.  Upon  his  shoulders 
fell  the  burden  of  saving  the  country  from  financial  ruin. 
The  Morgan  library  looked  like  the  headquarters  of  an 
army.  Here  were  congregated  at  all  hours  of  the  day  and 
night  bankers,  brokers,  business  men  of  all  kinds,  both  those 
who  needed  help  and  those  who  could  assist  the  banker  in 
the  work  he  had  thrust  upon  him  and  the  ardous  duties 
which  he  had  assumed.  Men  rushed  in  and  out  of  that  li- 
brary, pleaded  for  help,  begged  for  information  and, 
awaiting  their  turn,  even  slept  in  its  luxurious  chairs.  The 
task  that  Morgan  and  his  associates  had  undertaken  was 
one  of  exceedingly  great  difficulty.  Despite  all  that  had 
been  done  to  dam  the  torrent  of  financial  disruption  and  the 
fact  that  each  weak  spot  was  strengthened  as  soon  as  dis- 
covered, the  banker  knew  that  his  herculean  efforts  might, 
be  brought  to  nothing  by  one  big  failure  which  would  let 
loose  the  panic  fears  it  was  sought  to  allay." 

As  we  have  now  had  fifteen  years  to  look  dispassionately- 
into  the  causes,  it  is  apparent  that  steel  had  a  great  deal  to 
do  with  this  debacle.  The  United  States  Steel  Corporation 
was  apparently  determined  to  absorb  the  Tennessee  Coal 
and  Iron  Company,  its  strongest  competitor.  The  latter 
company  had  been  making  big  inroads  into  the  business  of 
the  larger  concern,  which  felt  that  it  should  either  destroy 
or  absorb  its  rival.  "The  friends  of  the,  corporation,  on  the 
other  hand,  are  equally  emphatic  in  asseverating  that  the 
competition  offered  by  the  Tennessee  company  was  not  such 
as  to  cause  anxiety  to  the  management  of  the  steel  corpora- 
tion, that  it  was  not  a  very  valuable  property  and  that  the 
corporation  purchased  its  stock  only  upon  solicitation  by 


214  HISTORY  OF  BUSINESS  DEPRESSIONS 

the  interests  controlling  the  company  and  their  assurance 
that  a  refusal  to  do  so  would  result  in  the  failure  of  an  im- 
portant security  house,  which  would  add  greatly  to  the 
severity  and  danger  of  the  panic.  They  claim  further  that 
the  price  paid  was  more  than  the  actual  value  of  the  stock 
and  that,  far  from  using  any  advantage  it  may  have  had  to 
squeeze  the  smaller  concern,  the  steel  trust,  against  the  bet- 
ter judgment  of  its  management  and  with  the  single  purpose 
of  alleviating  the  panic  dangers,  paid  for  the  securities  it 
took  over  something  like  60  per  cent  more  than  good  business 
practice  seemed  to  warrant." 

Cotter  in  his  "History  of  the  United  States  Steel  Cor- 
poration" says :  "If  the  claims  of  the  first  are  correct  and 
the  corporation  did  use  its  power  to  force  a  competitor  to 
the  wall,  regardless  of  the  fact  that  in  so  doing  it  was 
bringing  misery  and  calamity  to  the  ninety  millions  of 
people  of  the  United  States,  this  act  alone  must  be  more 
than  sufficient  to  convict  it  on  a  more  serious  charge  than 
'monopoly  in  restraint  of  trade' — of  high  treason  and  be- 
trayal of  the  trust  which  big  business,  willy  nilly,  under- 
takes. But  if  the  corporation,  through  its  directors,  put  the 
national  welfare  before  all  other  considerations  this,  con- 
versely, should  prejudice  public  opinion,  properly  informed, 
in  its  favor.  And  this  is  why  the  year  was  by  far  the  most 
important  epoch  in  the  corporation's  history  and  its  events 
are  worthy  of  careful  consideration." 

An  officer  of  the  Tennessee  Company  later  said:  "The 
sale  of  the  Tennessee  Company  was  an  incident  arising  in 
the  course  of  the  panic,  not  a  cause.  The  corporation  was 
offered  a  chance  to  get  what  I  consider  a  valuable  property 
and  seized  it.  But  let  me  tell  you,'"  he  added,  "the  corpo- 
ration did  not  get  the  property  cheap." 

On  the  other  hand,  other  members  of  the  Tennessee  organ- 
ization did  give  damaging  testimony  against  the  United 
States  Steel  Corporation  in  the  suit  brought  by  the  govern- 
ment to  dissolve  the  corporation.  The  story  is  told  that  the 


HISTORY  OF   BUSINESS  DEPRESSIONS  215 

Tennessee  Company  secured  an  order  from  E.  H.  Harriman 
for  150,000  tons  of  steel  rails  early  in  1907  and  this  angered 
the  steel  corporation  to  such  an  extent  that  plans  were  set 
under  way  to  put  the  Tennessee  company  out  of  competition. 
Whether  the  steel  trust  actually  and  premeditately  planned 
and  brought  on  the  panic,  or  whether  they  waited  for  a 
financial  storm  of  its  own  making  to  bring  them  their  op- 
portunity is  a  mooted  question.  Banks  often  get  in  trouble 
and  are  helped  by  others,  and  some  claim  that  the  Knicker- 
bocker Trust  Company  under  ordinary  circumstances  would 
have  been  helped  by  Morgan.  The  father  of  the  steel  trust 
passed  up  help,  looking  in  the  direction  of  the  Trust  Company 
of  America,  against  which  also  rumors  had  started  and 
whose  officers  were  controlling  stockholders  in  the  Ten- 
nessee company. 

George  B.  Cortelyou,  Secretary  of  the  Treasury,  had  hur- 
ried to  New  York  on  the  night  of  October  22nd  and  went  into 
conference  with  Morgan,  Geo.  W.  Perkins,  Jr.,  James  Still- 
man,  and  Henry  B.  Davidson.  They  later  summoned  Oak- 
ley Thorne,  president  of  the  trust  company,  and  agreed  to 
assist  his  institution.  The  next  morning,  however,  the  run 
started  and  a  clamorous  mob  surged  through  the  doors  and 
demanded  its  money. 

After  the  storm  had  lulled  Judge  Gary  and  Henry  C. 
Frick,  representing  the  steel  trust,  went  to  Washington  and 
obtained  an  interview  with  President  Roosevelt,  who  had 
with  him  William  Loeb,  Jr.,  and  Elihu  Root,  Secretary  of 
State.  Roosevelt  was  asked  for  his  approval  of  the  taking 
over  of  the  Tennessee  company  by  the  steel  corporation. 
Under  the  circumstances  Roosevelt  said  he  would  put  no 
obstacle  in  the  way  of  the  completion  of  the  transaction, 
although  he  had  no  power  to  give  it  any  official  sanction. 
Two  points  stand  out  in  the  whole  transaction  that  allow 
the  reader  to  draw  his  own  conclusion.  First,  the  Morgan 
interests  which  controlled  the  United  States  Steel  Corpora- 
tion did  save  the  Trust  Company  of  America,  but  after  they 


216  HISTORY   OF   BUSINESS   DEPRESSIONS 

had  in  their  possession  controlling  shares  in  the  Tennessee 
Coal  and  Iron  Company.  Second,  while  Roosevelt  unoffi- 
cially acquiesed  in  the  merger,  the  fact  is  that  the  deal  was 
already  closed  and  would  have  been  consummated  whether 
or  no.  However,  had  the  administration  been  antagonistic, 
the  Government  might  have  had  a  better  chance  to  win  its 
suit  of  dissolution  later. 

A  peculiarity  of  the  situation  also,  was  the  fact  that 
Moore  and  Schley,  leading  brokers  of  Wall  Street,  became 
embarrassed  to  the  extent  of  several  million  dollars.  Affairs 
of  this  concern  were  deeply  mixed  with  the  Tennessee  com- 
pany, one  member  of  the  firm  being  one  of  the  syndicate  that 
controlled  the  Tennessee  company  and  the  firm  itself  had 
marketed  a  considerable  proportion  of  the  securities  of  the 
Tennessee  company.  This  firm  was  also  saved  by  Morgan 
by  the  surrender  of  Tennessee  securities  which  it  held. 

Another  reason  for  the  steel  company's  supposed  fear 
of  the  Tennessee  company  was  that  the  latter,  being  located 
in  the  South,  would  be  in  a  position  to  capture  not  only  the 
business  below  the  Mason  and  Dixon  line,  but  would  have  a 
distinct  advantage  in  exporting  steel  to  Latin  America. 
The  steel  trust  always  claimed  that  the  merger  saved  the 
financial  situation  and  stopped  the  panic. 

Following  the  successful  merger  which  so  pleased  the 
steel  corporation,  Judge  Gary,  it  is  said,  gave  on  November 
20th  the  first  of  the  famous  dinners  which  were  later  widely 
criticized  in  the  newspapers.  The  stated  object  was  to  get 
all  the  steel  operators  together  for  the  purpose  of  devising 
ways  and  means  to  meet  the  exigency  arising  out  of  the 
.panic  then  existing  and  to  prevent  further  calamity  to  the 
industry.  The  ways  and  means  devised  consisted  of  nothing 
more  than  an  agreement  to  hold  prices  firm,  to  keep  their 
heads  and  avoid  the  consequence  of  reckless  price  cutting. 
While  this  was  practically  an  agreement  in  restraint  of 
trade  among  the  steel  people,  yet  it  no  doubt  helped  greatly 
to  alleviate  the  panicky  conditions  and  get  business  back 


HISTORY   OF  BUSINESS   DEPRESSIONS  217 

to  normal.  While  all  circumstantial  evidence  shows  that 
there  was  a  deliberate  attempt  on  the  part  of  the  steel  cor- 
poration to  bring  its  competitors  to  terms,  resulting  in  its 
success  as  incident  to  the  panic,  yet  there  is  no  telling  after 
the  panic  was  on  where  the  end  would  have  been  had  the 
merger  not  taken  place. 

The  effects  of  the  depression  on  the  United  States  Steel 
Corporation  were  reflected  in  the  last  quarter,  earnings  for 
those  three  months,  net  for  dividends,  being  only  $18,614,- 
416,  compared  to  $28,758,142  for  the  three  months  preced- 
ing. But  it  was  not  until  1908  that  the  full  force  of  the 
storm  was  to  be  seen.  In  the  first  quarter  of  this  year  net 
profits  applicable  to  dividends  dwindled  to  $8,854,297.37, 
compared  with  $27,031,008.20  a  year  previous,  and  second 
quarter  profits  were  $9,042,027.55  against  $30,843,512.61 
in  the  same  period  in  1907. 

At  this  time  Thomas  A.  Lawson,  running  a  series  of  ar- 
ticles in  a  magazine,  exposed  "the  system"  and  among  the 
panic  producers  must  be  recognized  these  vitrolic  articles. 

Few  railroads  were  forced  into  bankruptcy,  and  the  pro- 
portion of  business  failures  was  not  so  high  as  after  the 
crisis  of  1893.  It  was  largely  a  rich  man's  panic  in  a  true 
sense,  the  effects  being  mostly  confined  to  the  stock  market 
and  credit  operations.  There  was  no  appreciable  decline  in 
prices,  wages,  land  values,  or  railroad  earnings. 

The  Postal  Savings  Bank  System  was  created  in  1910,  the 
agitation  for  it  having  started  in  the  panic  of  1907.  It  was 
pointed  out  that  small  depositors  had  a  tendency  to  with- 
draw their  deposits  from  the  savings  banks  in  the  times  of 
financial  crisis  and  it  was  proposed  to  establish  postal 
savings  banks  in  order  that  the  small  depositors  could 
leave  their  money  with  the  Government  at  a  small  rate  of 
interest.  Thus  the  memorable  panic  of  1907  again  served  a 
great  good  after  all  the  suffering  it  brought. 


CHAPTER  XXIV 
THE  DEPRESSION  OF  1914 

The  money  crisis  at  the  outbreak  of  the  World  War,  while 
of  short  duration,  was  of  unequaled  intensity  or  extent. 
Practically  every  stock  exchange  in  the  world  was  closed, 
but  the  needs  of  the  day  were  so  imperative  that  business 
soon  resumed  after  the  immediate  effects  of  the  shock. 
The  world  financial  system  held  its  equilibrium,  but  business 
suffered  according  to  the  relations  of  the  various  countries 
with  those  at  war.  Some  claim  that  world  events  could  be 
forseen  as  early  as  1912. 

According  to  Hull  "the  business  world  seemed  merely  to 
be  hesitating,  to  be  timorous  about  making  new  ventures, 
to  question  the  future  as  if  ripening  for  the  great  war,  for 
although  conditions  over  the  end  of  1912  and  into  1913  were 
good,  this  hesitancy  was  still  in  evidence,  something  ominous 
seemed  to  hang  over  the  world  of  business  and  finance. 
Probably  then  some  of  the  leaders  of  finance  foresaw,  even 
though  dimly  and  uncertainly,  the  trouble  that  was  brewing. 
The  depression  really  started  in  1913.  When  the  war  broke 
out  July  30th,  1914,  disastrous  results  followed  in  the  busi- 
ness world.  Industry  was  just  beginning  to  struggle  out 
from  the  depression  that  had  begun  in  the  latter  half  of 
1913,  when  the  sudden  clash  of  arms  paralyzed  world  money 
markets,  closed  the  stock  and  other  exchanges,  closed  or  re- 
stricted operations  at  hundreds  of  plants  of  one  kind  or 
another,  and  threw  thousands  of  workers  out  of  employment. 
The  demand  for  steel,  never  very  active  at  any  time  since 
about  July,  1913,  fell  almost  to  a  vanishing  point,  and  earn- 
ings of  the  United  Steel  Corporation,  in  the  last  quarter 
declined  to  the  lowest  point  in  its  history — $10,935,635.36 
Total  earnings  for  the  year  were  only  $71,663,615.17,  and 
although  the  dividend  rate  on  the  common  stock  was  re- 
duced from  5  per  cent  to  2  per  cent  annually  in  the  third 
quarter,  and  the  dividend  for  the  last  quarter  was  passed, 
earnings  were  not  sufficient  to  meet  charges,  and  a  deficit 


HISTORY   OF  BUSINESS   DEPRESSIONS  219 

• 

of  $16,971,983.83  was  reported.     The  company  passed  all 
dividends  for  the  first  time  in  its  history." 

At  that  time  we  owed  a  large  sum  of  gold  to  Europe  and 
her  banks  hastened  to  recall  it  because  of  the  needs  of  war, 
but  it  soon  flowed  back  in  payment  for  the  phenomenal  ex- 
ports of  war  material. 

An  account  of  this  crisis  coincides  with  the  history  of  the 
inauguration  of  the  Federal  Reserve  System.  This  law  was 
drawn  up  in  1913  by  the  House  "Banking  and  Currency 
Committee"  of  the  Sixty-second  Congress.  Honorable 
Carter  Glass,  of  Virginia,  later  Secretary  of  the  Treasury, 
was  chairman,  and  it  was  enacted  as  a  law  just  in  time  to 
save  us  from  a  great  financial  catastrophe.  At  the  out- 
break of  the  war  in  the  Summer  of  1914,  Europe  began 
withdrawing  gold  in  enormous  quantities,  and  it  was  at 
once  evident  to  all  that  very  striking  changes  would  result 
in  every  department  of  business  life.  The  closing  of  the 
principal  stock  exchanges  of  the  country  almost  immediately 
upon  the  definite  announcement  that  the  war  was  unavoid- 
able was  thus  dictated  by  two  considerations.  First,  the 
belief  that  prices  for  stocks  and  other  securities  would  be 
reduced  to  a  point  so  low  as  to  bring  about  the  repurchase 
of  the  securities  by  Americans,  who  would  then  be  obliged 
to  pay  for  them  in  gold;  and  secondly,  the  belief  that,  in 
consequence  of  this  reduction  of  prices,  many  bank  loans 
based  upon  securities  would  have  to  be  "called,"  thereby 
bringing  about  failures  and  incidentally  assisting  in  the 
movement  of  specie  out  of  the  country.  The  exchanges  had 
closed  in  previous  years,  but  never  for  the  reasons  which 
now  controlled  them. 

Laughlin  writes :  "That  they  should  close  because  of  the 
fear  of  failure  and  the  loss  of  gold  implied  a  serious  danger 
of  disaster  which  appealed  powerfully  to  the  public  mind, 
and  which  presented  a  problem  that  could  not  be  explained 
away.  The  fact  that,  coincident  with  this  closing  of  the 
exchanges,  international  trade  was  practically  suspended 
for  several  days,  and  was  seriously  interrupted  for  several 


220  HISTORY   OF  BUSINESS   DEPRESSIONS 

weeks,  until  British  vessels  assumed  control  of  the  North 
Atlantic,  tended  greatly  to  increase  the  public  anxiety.  It 
formed,  apparently,  good  ground  for  the  suspension  of 
business  operations  and  for  the  non-fulfillment  of  contracts, 
even  when  the  very  difficult  conditions  did  not  themselves 
compel  a  recourse  to  such  methods.  The  fact  that  foreign 
countries  had  adopted  legislation  deferring  the  date  when 
debts  need  be  paid  or  contracts  fulfilled,  although  not  paral- 
leled here,  produced  a  sympathetic  influence  upon  business 
in  the  United  States,  which  practically  resulted  in  the  partial 
or  tentative  adoption  of  a  somewhat  similar  relaxation  of 
commercial  requirements  in  many  industries  and  branches 
of  trade.  Europe  was  throwing  American  securities  on 
the  market  by  loads,  and  when  the  exchanges  opened  the 
banks  still  found  themselves  under  great  strain  to  meet  the 
situation.  The  national  currency  associations,  which  had 
numbered  only  eighteen  up  to  the  beginning  of  the  European 
war,  rapidly  increased  until  they  aggregated  forty-four, 
and  prompt  preparations  were  made  in  Washington  for 
supplying  emergency  currency,  under  the  terms  of  the  Fed- 
eral Reserve  Act,  to  any  such  association  as  might  need  the 
notes.  At  the  same  time,  practically  all  of  the  clearing- 
house associations  of  the  larger  cities  arranged  for  the 
issuing  of  certificates." 

Congress  amended  the  measure  lowering  the  rates  of 
taxation  upon  emergency  issues  and  giving  wider  latitude 
for  the  issuing  of  currency.  Under  this  act  a  total  of  $380,- 
000,000  was  put  into  circulation,  together  with  clearing- 
house certificates  of  $211,000,000,  a  total  of  nearly  $600,- 
000,000  of  new  money  that  went  into  circulation  in  this 
country  within  a  few  months.  Apparently,  no  need  could 
be  had  for  such  sums  unless  there  were  withdrawals  in  other 
directions.  No  doubt  this  is  what  occurred,  banks  hoarding 
the  cash  by  withholding  it,  so  far  as  possible,  both  from  one 
another  and  from  the  public;  while  the  public  hoarded 
lawful  money  by  retaining  it  as  it  came  into  its  possession, 
and  applying  to  the  banks  for  more  supplies  of  circulating 
media. 

Foreign  exchange  rates  soon  became  prohibitive,  and  for 
a  time  trade  between  this  country  and  the  Old  World  was 


HISTORY  OF  BUSINESS  DEPRESSIONS  221 

practically  suspended.  "The  breakdown  of  trade  with 
Europe  through  the  inability  of  vessels  to  run  regularly  at 
the  outset  of  the  war,  and  through  the  reduction  of  buying 
power,  due  to  the  interruption  of  all  regular  industrial, 
commercial,  and  financial  operations,  meant  that  in  the 
absence  of  some  restoration  of  the  normal  course  of  busi- 
ness it  would  be  necessary  to  find  other  means  of  liquidating 
our  obligations  to  foreign  countries."  In  order  to  relieve 
the  situation  and  keep  the  money  at  home  the  Federal  Re- 
serve Board  began  an  investigation  to  ascertain  the  extent 
of  international  indebtedness,  so  that  a  means  could  be  had 
to  liquidate  without  sending  more  gold  abroad. 

The  Allies  were  very  desirous  of  keeping  the  good  will 
of  business  interests  in  the  United  States  and  after  a  few 
months  pressure  was  greatly  lessened  from  that  source. 
In  a  short  time  the  urgent  pressure  for  note  accommodation 
passed  away,  gold  reappeared  in  circulation,  clearing-house 
certificates  were  retired,  and  practically  the  whole  of  the 
emergency  currency  was  taken  up  within  ten  months  from 
the  beginning  of  the  crisis. 

The  closing  of  the  stock  exchange  affected  business  in 
every  direction,  despite  the  great  issues  of  temporary 
clearing-house  certificates.  Several  enormous  failures  oc- 
curred in  June  and  July,  including  the  Claflin  catastrophe. 
Bank  clearings  for  the  whole  country  fell  to  $155,000,000,- 
000,  from  $170,800,000,000  in  the  previous  year.  Liabilities 
of  failures  touched  nearly  $350,000,000,  the  heaviest  mor- 
tality for  twenty-two  years,  involving  over  1  per  cent  of  the 
total  number  of  firms  in  business. 

A  writer  on  the  steel  and  iron  industry  says :  "So  acute 
was  the  depression  that  it  was  decided  to  stop  construction 
work  at  the  new  Duluth  plant  of  the  United  States  Steel  Cor- 
poration in  the  Fall  of  the  year.  Expenditures  for  this  ac- 
count for  1914  amounted  to  $4,094,363.97.  In  December, 
1914,  production  at  the  corporation's  plants  fell  to  the  lowest 
point  ever  recorded.  The  general  average  of  operations  was 
reported  to  have  been  about  25  per  cent  but  this  is  probably 


222  HISTORY   OF   BUSINESS   DEPRESSIONS 

somewhat  overstated,  as  two  of  the  largest  subsidiaries 
reduced  operations  as  low  as  15  per  cent  in  one  case,  and 
18  per  cent  in  the  other,  during  the  last  fortnight  of  the  year. 
Never  did  a  year  dawn  blacker  for  the  steel  trade  than  did 
1915.  The  financial  upset  that  followed  the  outbreak  of  the 
great  war  paralyzed  industry,  and  the  effect  was  felt  in 
steel,  the  barometer  of  trade.  Closing  1914  with  operations 
at  the  lowest  point  in  years — perhaps  on  record — and  with 
no  actual  sign  of  early  betterment,  it  was  small  wonder 
that  all  except  the  perpetual  optimists  faced  the  future  with 
some  dread.  And  the  events  of  the  early  part  of  the  year 
seemed  to  justify  this  dread.  In  the  month  of  January  the 
steel  corporation's  earnings  fell  to  the  lowest  point  on 
record,  $1,687,150." 

Cotton  fell  to  the  lowest  point  it  had  reached  for  several 
decades,  bringing  five  and  six  cents  on  the  plantation.  The 
distress  was  so  severe  that  the  "Buy-a-bale"  movement 
started  and  spread  over  the  country.  Northern  wholesale 
merchants  and  investors  bought  a  bale  in  order  to  relieve 
the  South,  and  the  wealthier  classes  throughout  the  cotton 
growing  states  bought  what  they  could  to  take  it  off  the 
market.  Many  who  did  so,  and  held  it,  sold  that  same  cotton 
later  for  upwards  of  thirty  cents. 

The  Underwood  tariff  had  begun  to  hurt.  Manufactur- 
ers feared  a  great  influx  of  imports  that  would  adversely 
affect  their  commodities.  The  depression  from  this  cause 
had  already  set  in  and  even  before  the  war  broke  out  it  was 
generally  expected  that  a  period  of  hard  times  was  ahead. 

While  this  depression  was  of  comparatively  short  dura- 
tion, it  is  surprising  to  note  that  the  number  of  failures  was 
greater  in  proportion  than  in  the  depression  of  1920-21. 
The  depression  lasted  well  into  1915,  when  orders  from 
Europe  began  pouring  in  and  a  period  of  abnormal  condi- 
tions followed. 


CHAPTER  XXV 
THE  DEPRESSION  OF  1920-21 

Chas.  Duguid  in  his  "Story  of  the  Stock  Exchange"  is 
the  only  prophet  we  can  find  who  might  lay  claim  to  having 
predicted  the  depression  of  1920.  After  referring  to  the 
South  Sea  Bubble  and  the  Mississippi  Bubble  of  1720  and 
the  world-wide  depression  of  1820,  starting  in  this  country 
in  1819,  he  said,  "The  history  of  1720  repeated  itself  in  1820, 
as  it  may — who  knows  ? — repeat  itself  in  1920." 

The  causes  which  may  be  given  now  from  the  best  judge- 
ment later  may  be  proven  wrong.  Certainly  in  economic 
affairs  as  well  as  in  romance  "distance  lends  enchantment." 
That  is  shown  in  perusing  the  newspapers  and  periodicals 
published  at  the  times  of  our  various  crises.  Time  proves 
that  writers  apparently  see  things  from  too  close  a  view- 
point. They  are  prone  to  take  a  narrow  view.  Many  ar- 
ticles written  at  the  time  of  the  various  depressions,  ascrib- 
ing different  causes,  have  later  proved  to  be  wrong;  indeed, 
many  of  them  ridiculous.  As  time  goes  on,  the  small  and 
minor  details  of  crises  that  are  often  magnified  are  lost  to 
view  and  the  main  causes  uncovered  by  time  itself.  At  the 
time  we  invariably  find  politics  given  as  the  paramount 
cause  of  business  depression.  The  administration  in  power 
is  always  condemned.  Jackson  was  blamed  for  the  crisis 
of  1837,  Cleveland  for  that  of  1893,  Roosevelt  for  that  of 
1907  and  Wilson  for  that  of  1920. 

The  central  buffer  which  receives  the  ultimate  shocks  of 
depression  is,  of  course,  finance.  Most  of  our  crises  and 
depressions  have  revolved  around  the  question  of  money  or 
the  medium  of  currency.  The  depression  of  1920-21  is  an 
exception  to  the  rule,  being  one  of  the  first  depressions  in 
our  history  in  which  the  question  of  money  or  currency  did 


224  HISTORY  OF   BUSINESS   DEPRESSIONS 

not  enter  either  in  cause  or  effect.  It  is  true  there  was  some 
demand  for  a  more  liberal  policy  of  rediscounting  by  the 
Federal  Reserve  Banks,  as  it  was  the  curtailment  of  credits 
that  largely  brought  on  the  depression. 

A  violent  quarrel  started  between  politicians  and  the  of- 
ficers of  the  Federal  Reserre  Board  regarding  the  advis- 
ability of  a  more  liberal  use  of  Federal  Reserve  notes 
and  a  reduction  in  the  discount  rate.  Governor  W.  P.  G. 
Harding,  of  the  Federal  Reserve  Board,  in  a  letter  to  Sena- 
tor Sheppard,  of  Texas,  said  that  wild  speculation  might 
result  from  such  action.  "If  our  present  large  gold  hold- 
ings were  deliberately  made  the  basis  for  an  undue  exten- 
sion of  domestic  credits,  as  might  well  be  the  case  if  our 
discount  rates  were  made  so  low  as  to  offer  an  alluring 
profit  to  banks,"  Governor  Harding  wrote,  "there  might 
develop  a  very  dangerous  condition  in  the  United  States. 
No  small  part  of  the  responsibility  of  the  Federal  Reserve 
system  is  to  make  sure  the  consequences  of  this  flood  of 
gold  is  not  wild  speculation  and  unsound  banking  practices." 

Terrific  price  declines  were  the  rule  of  the  day,  and  these 
so  shocked  the  industrial  system  that  there  is  little  doubt 
that  but  for  the  Federal  Reserve  System  an  unprecedented 
panic  would  have  ensued.  The  Federal  Reserve  Board  may 
have  justly  deserved  some  of  the  criticisms  directed  against 
it  because  of  its  policy  of  too  sharp  action.  Mistakes  were 
made,  no  doubt,  and  it  since  has  been  admitted  that  the  same 
result  could  have  been  accomplished  by  a  more  gradual  de- 
flation attended  with  a  lesser  degree  of  loss  particularly  as 
regards  to  agriculture.  On  the  other  hand,  Governor  Hard- 
ing and  other  members  of  the  Board  give  as  their  defense 
the  fact  that  they  repeatedly  warned  business  and  finance 
to  start  deflation.  They  claimed,  and  it  is  true,  that  their 
warnings  were  disregarded,  and  not  only  was  there  no  start 
made  in  deflation,  but  inflation  continued.  It  is  further 
known  that  even  after  the  Federal  Reserve  Board  absolutely 
shut  down  and  deflation  had  set  in,  bringing  depression  in 


HISTORY  OF  BUSINESS   DEPRESSIONS  225 

many  lines,  yet  thousands  of  business  men  refused  to  be- 
lieve that  a  reversal  was  coming.  Many  went  straight  ahead, 
using  up  the  round  sums  they  had  made  during  the  war 
period  and  continued  expansion  beyond  reason.  The  people 
as  a  whole  continued  their  extravagant  habits,  feeling  that 
the  depression  would  be  of  short  duration. 

In  looking  back  it  is  apparent  now  that  there  could  have 
been  a  middle  ground;  that  the  deflation  could  have  come 
more  gradually  by  the  proper  use  of  resources  at  our  com- 
mand through  the  Federal  Reserve  System.  Let  us  not  over- 
look the  idea  that  business  has  its  rights  the  same  as  banks. 
The  banker  would  not  like  it  if  he  were  forced  to  liquidate 
too  quickly.  He  simply  could  not  do  it.  Yet  the  banker 
takes  a  notion  all  at  once  that  business  must  liquidate.  In- 
stead of  giving  business  the  same  time  that  banks  would 
require  he  proceeds  to  force  things  at  the  drop  of  the  hat. 
Liquidation  and  deflation  should  have  been  stretched  out 
over  a  period  of  three  or  four  years,  and  we  could  have 
returned  to  normal  without  the  great  shock  of  depression 
that  we  are  passing  through.  We  did  it  after  the  Civil  War, 
assuming  that  the  panic  of  1873  had  nothing  to  do  with  the 
war  period.  I  know  what  my  industrial  friends  will  say  in 
answer  to  this.  They  will  answer  it  by  asking  the  question, 
"How  could  we  have  liquidated-  labor  without  the  depres- 
sion?" Admittedly  that  is  the  hardest  question  that  could 
be  put  to  me  to  answer,  because  no  man  can  tell  what  the 
attitude  of  labor  would  have  been.  The  probability  is  that 
labor  would  have  balked.  Though  their  leaders  may  have 
tried  to  lead  them  aright,  yet  these  leaders  themselves  know 
only  too  well  how  difficult  that  is. 

"What  might  have  occurred  during  that  period  without 
the  facility  of  Federal  Reserve  note  issue  is  impossible  to 
surmise,"  says  Laughlin,  "but  the  magnitude  of  the  prob- 
lem is  indicated  by  the  fact  that  money  in  circulation  in- 
creased from  $3,419,000,000  on  July  1,  1914  to  $6,393,000,- 
000  in  November,  1920,  when  the  peak  was  reached,  during 
which  period  the  net  increase  of  gold  held  in  the  country 


226  HISTORY   OF   BUSINESS   DEPRESSIONS 

was  only  $848,365,000,  and  that  gold  constituted  the  reserve 
base  for  probably  ten  times  that  amount  of  credit  created 
in  the  process  of  the  Government's  financing  its  war  ex- 
penditures. On  December  23,  1920,  they  were  outstanding 
in  the  total  amount  of  $3,404,931,000  as  compared  with 
$2,420,831,000  on  November  9,  1921,  a  decrease  of  $984,- 
100,000  in  eleven  months. 

"During  the  war  we  did  the  unbelievable.  The  people 
furnished  in  taxes  and  loans  to  the  Government  the  stu- 
pendous sum  of  $34,000,000,000  to  carry  on  the  war,  and 
besides  that  we  carried  on  unprecedented  enterprises, 
much  of  it  on  a  credit  basis.  But  at  the  end  of  1919  com- 
bined demands  of  both  these  factors  brought  us  to  the 
limit  of  our  banking  power.  The  way  we  were  going  it  is 
a  question  whether  we  realized  that  there  was  such  a  thing 
as  a  limitation  of  credit.  We  now  see  where  we  made  many 
mistakes  in  our  wartime  finances.  It  was  a  time  of  enor- 
mous profits,  and  the  discount  rate  should  have  been  raised 
on  both  war  and  commercial  paper,  as  borrowers  could  have 
well  afforded  to  pay  for  it.  It  is  also  now  seen  that  ex- 
pansion should  have  been  penalized  at  its  source  by  auto- 
matically adding  a  sliding  scale  or  commission  to  the  rate  of 
discount  to  member  banks  as  their  re-discounts  rose  rela- 
tively to  their  capital.  We  had  an  abundance  of  gold  con- 
centrated in  the  hands  of  reserve  banks,  but  it  created  a 
dangerous  over-confidence.  This  high  funded  gold  en- 
couraged expansion  and  deposits  and  notes  rose  to  such 
figures  that  no  great  margin  of  free  gold  was  left.  The  halt 
should  have  come  before  it  did,  because  it  was  plainly  evi- 
dent that  a  sudden  reversal  in  international  trade  would 
call  for  gold  exports  and  leave  us  in  a  serious  predicament." 

The  victors  in  the  Great  War  suffered  more,  economically, 
from  the  aftermath  than  did  the  defeated.  The  peculiarity 
of  war  is  that  often  the  victors,  attaining  the  objects  of  the 
war,  find  themselves  in  as  severe  internal  difficulty  as  the 
loser.  This  was  the  case  in  the  Napoleonic  wars,  when  the 
victors  suffered  through  depression  as  much  as  the  van- 
quished, and  again  in  1870  when  Germany  experienced  a 
violent  crisis  and  depression  after  her  victory  over  France, 
while  the  latter  prospered.  Half  in  humor  and  half  in 
earnest,  a  German  comic  newspaper  said  at  the  time :  "Let 


HISTORY   OF   BUSINESS   DEPRESSIONS  227 

us  have  another  war ;  let  us  be  beaten  and  pay  an  indemnity 
and  then  we  shall  be  prosperous  again." 

The  depression  in  Great  Britain  was  equally  as  great 
proportionately  as  in  this  country.  France  also  suffered  a 
depression  because  of  the  readjustment  of  war  prices,  but 
not  to  any  such  degree  as  in  Great  Britain  and  America. 
The  other  allied  countries  suffered  severely — Italy,  Japan, 
Greece,  and  the  smaller  nations.  The  repudiation  of  the 
Russian  debt,  in  some  respects,  counter-balanced  the  enor- 
mous indemnity  exacted  from  Germany.  This  is  the  second 
time  in  history  that  Russia  has  repudiated  her  national 
debt.  In  1843  the  empire  declared  itself  bankrupt  and 
paid  two-sevenths  in  a  new  issue  of  currency  for  the  old 
issues  that  were  outstanding.  The  Italian  Government 
met  the  problem  of  unemployment  and  depression  heroic- 
ally. The  sum  of  $32,000,000  was  voted  for  public  works 
and  land  reclamation.  The  water  power  and  natural  re- 
sources of  the  country  were  developed  and  $6,000,000  more 
spent  for  laying  cables  to  Spain,  Greece  as  well  as  South 
American  countries,  rendering  Italian  trade  independent 
of  foreign  cable  lines. 

We  have  heard  much  adverse  criticism  of  the  paper  cur- 
rency regime  in  Germany.  Dire  predictions  are  made  as  to 
the  outcome.  But  while  we  are  making  these  predictions  let 
us  not  forget  that  our  own  country  went  through  the  same 
periods  of  paper  currency,  not  only  once  but  several  times, 
and  we  have  come  out  whole. 

After  the  depression  set  in  in  1920,  and  including  the 
first  three-quarters  of  1921,  failures  numbered  6,503 — in- 
volving $202,532,000— August  1921  showing  the  greatest 
number  of  defaults,  a  total  of  1,562.  Unlike  most  previous 
depressions  the  West  was  the  least  affected.  Only  565 
failures  were  reported  from  the  Central  West,  with  $7,740,- 
727  of  liabilities  as  against  1,695  in  the  Middle  Atlantic, 
with  $46,406,944  of  liabilities.  Altogether  17,000  concerns, 
large  and  small,  were  forced  to  go  out  of  business  in  1920 


228  HISTORY  OF  BUSINESS  DEPRESSIONS 

and  1921  and  a  large  number  of  others  no  doubt  suffered 
enormous  losses. 

When  the  depression  set  in  people  started  saving.  Every- 
body had  spent  wildly,  getting  little  value  for  their  money, 
until  the  buyers'  strike  came  and  men  were  thrown  out  of 
employment.  Then  they  started  saving. 

Preceding  the  depression  prices  of  average  commodities 
were  higher  than  ever  before  known  in  the  memory  of 
people  living.  However,  they  did  not  reach  the  prices  that 
prevailed  during  the  Napoleonic  wars,  the  price  peak  of  all 
our  national  history  having  been  reached  in  1815. 

Whatever  differences  of  opinion  may  exist  as  to  the  main 
and  principal  cause  of  this  depression,  all  admit  that  the 
buyers'  strike  had  a  great  deal  to  do  with  it.  The  public  had 
gone  its  limit  and  refused  to  put  up  with  further  profi- 
teering. There  was  the  wholesaler  and  other  middle  men, 
each  taking  a  long  profit.  Figures  indisputably  show, 
however,  that  the  retailer  was  the  greatest  profiteer  and  of 
all  hands  through  whom  merchandise  went  on  its  way  to 
the  consumer  the  manufacturer  was  the  "gamest."  That 
substantiates  the  best  theory  of  all  economists  for  decades 
back.  There  is  less  proportionate  profit  in  manufacturing 
than  in  any  end  of  merchandising.  All  available  records 
show  the  predominance  of  wealth  in  mercantile  communi- 
ties over  manufacturing  communities.  The  greatest  wealth 
invariably  goes  to  the  selling  center  rather  than  the  manu- 
facturing center,  proportionately  speaking. 

A  certain  merchant  liked  to  make  excuses  for  his  prof- 
iteering by  telling  about  how  he  sold  shoes.  He  placed 
ladies'  shoes  on  sale  at  $7  and  at  the  side  of  those  the 
identical  shoe,  excepting  a  different  style,  for  $12.  He 
boasted  that  nine  out  of  ten  purchasers  would  by  the  $12 
shoes.  That  merchant  may  not  know  it,  but  such  instances 
is  what  helped  bring  on  the  depression  of  1920.  His  cus- 
tomers eventually  found  out  that  they  had  been  tricked.  It 
was  not  smartness  on  the  part  of  the  merchant  that  caused 


HISTORY  OF  BUSINESS  DEPRESSIONS 


229 


230  HISTORY   OF   BUSINESS   DEPRESSIONS 

the  customer  to  buy  the  $12  shoes.  Times  were  prosperous, 
the  customer  had  money,  could  afford  the  best  and  wanted 
the  best.  When  they  bought  $12  shoes  they  trusted  the 
merchant  to  give  them  $12  values,  not  being  leather  experts 
themselves.  When  the  customer  found  that  the  merchants 
were  taking  advantage  of  their  trust,  easing  their  conscience 
with  the  thought  that  "everybody  is  doing  it,"  they  revolted, 
bringing  on  what  was  called  the  "buyers'  strike." 

In  the  far  background  the  failure  of  America  to  enter  the 
League  of  Nations  was  another  cause  of  the  depression. 
This  opinion  is  held  by  Republicans  and  Democrats  alike,  by 
supporters  and  opponents  of  the  father  of  the  League.  That 
body  offered  a  medium  through  which  we  could  get  our 
heads  together  with  other  nations  upon  whom  we  are  more 
or  less  dependent  and  help  them  solve  their  problems.  By 
admitting  Austria  and  Germany  the  League  could  have 
established  a  monetary  commission  which  would  have  de- 
vised ways  and  means  of  stabilizing  exchange,  of  funding 
the  international  indebtedness,  and  general  promotion  of 
international  commerce.  The  world  will  come  to  see  the 
day  when  it  realizes  the  price  we  have  paid  for  the  stub- 
bornness of  one  man  and  the  spite  of  a  group  of  others. 

Confidence  in  our  money  system  was  a  bright  feature  of 
the  1920  depression  there  being  no  runs  on  banks  of  any 
consequence.  There  were  no  outstanding  failures,  no  spec- 
tacular panic,  although  in  various  parts  of  the  country 
smaller  banks  closed  their  doors  and  some  consolidated  with 
stronger  institutions  in  order  to  pull  through  the  stringency. 
There  were  a  large  number  of  failures,  but  mostly  superflu- 
ous concerns  which  had  no  good  reason  for  existence.  There 
were  no  restrictions  on  withdrawals  of  deposits,  no  morato- 
ria,  no  stock  exchanges  closed.  We  had  in  our  vaults  50 
per  cent  of  the  world's  gold,  which  was  a  bulwark  against 
loss  of  confidence. 

In  1920  there  was  a  grocery  store  to  every  218  persons 
in  the  United  States,  or  one  to  every  forty-eight  families,  ac- 


231 

cording  to  Alvin  E.  Dodd,  manager  of  the  Department  of 
Domestic  Distribution  of  the  United  States  Chamber  of 
Commerce,  who  intimates  in  an  article  in  the  Nation's 
Business  that  there  may  be  too  many  retailers.  On  the 
basis  of  the  estimated  average  family  budget  the  average 
grocer  in  the  United  States  would  have  an  annual  turn-over 
of  only  $9,400.  This  is  too  small  to  permit  him  to  obtain  a 
living,  and  the  result  appears  in  the  high  mortality  rate  in 
this  trade.  In  1920  there  was  one  failure  for  every  two 
hundred  grocers  in  the  country,  and  in  the  past  five  years, 
although  during  this  time  the  country  was  highly  prosper- 
ous, retail  grocers  succumbed  at  the  rate  of  about  twenty  a 
day.  "This,  of  course,  only  means  that  competition  is 
simply  weeding  out  the  unfit  and  that  economic  laws  will 
not  be  thwarted." 

Our  population  was  practically  double  in  1920  the  popu- 
lation at  the  time  of  the  depression  of  1873,  at  which  time 
three  million  workers  were  thrown  out  of  employment. 
According  to  figures  given  out  by  President  Harding's  un- 
employment conference  the  unemployment  reached  six  mil- 
lion. From  that  angle  the  depression  of  1920  was  equally 
as  bad  as  any  on  record.  However,  economists  point  out 
that  in  1920  perhaps  two  and  one-half  million  were  counted 
among  the  unemployed  who  were  not  heads  of  families  or 
needed  wage-earners,  but  who  had  been  pressed  into  the 
ranks  of  workers  during  the  war. 

History  repeats  itself  with  uncanny  regularity  in  cycles 
of  business  depression.  Referring  back  a  hundred  years  to 
the  depression  known  as  the  panic  of  1819,  but  at  its  worst 
in  1820,  a  writer  in  Niles  Register  says;  "Mail  robberies 
and  piracies  are  the  order  of  the  day."  How  like  our  own 
times ! 

In  1921  mail  robberies  were  so  numerous  that  Postmaster 
General  Hays  and  Secretary  of  the  Navy  Denby  placed  arm- 
ed marines  on  mail  trains  and  at  stations  where  mails  were 
handled. 


232  HISTORY  OF  BUSINESS   DEPRESSIONS 

One  of  the  big  factors  of  the  depression,  and  the  one 
which  undoubtedly  prolonged  it,  was  the  enormous  issue  of 
tax  free  bonds.  In  order  to  avoid  excessive  war  taxation  on 
incomes  investors  bought  tax  free  state,  county,  and  muni- 
cipal bonds.  Such  issues  were  eagerly  grabbed  up  on  the 
market,  creating  an  orgy  of  public  spending  at  exhorbitantly 
high  prices  and  taking  the  wealth  of  the  nation  out  of  the 
channels  of  trade  and  industry.  Money  used  in  public  work 
goes  through  a  slow  process  in  getting  back  into  the  chan- 
nels of  commerce.  It  often  is  injudiciously  used  and  the 
large  amount  of  money  spent  in  this  direction  retarded 
business  activities  because  of  tied  up  credits  in  channels  of 
slow  liquidation.  "As  a  rule,"  says  John  Mills,  "panics  do 
not  destroy  capital ;  they  merely  reveal  the  extent  to  which 
it  has  been  previously  destroyed  by  its  betrayal  into  hope- 
lessly unproductive  works." 

Steel  and  iron  people  claim  that  the  depression  of  1914 
was  worse  than  1920-21,  claiming  the  percentage  of  unem- 
ployment was  not  so  great  and  there  was  plenty  of  money 
to  be  had  in  the  recent  depression,  whereas  in  1914  money 
was  very  scarce. 

President  Harding,  upon  coming  into  office,  found  a 
deplorable  state  of  affairs  with  increasing  distress  and  un- 
employment. As  winter  approached  a  conference  of  indus- 
trial and  labor  leaders  and  well  known  economists  was 
called  under  the  leadership  of  Herbert  Hoover,  Secretary 
of  Commerce.  This  conference  attempted  to  devise  ways 
and  means  of  alleviating  unemployment.  Many  plans  were 
proposed  and  discussed,  but  the  outgrowth  of  it  all  was  that 
there  was  nothing  to  do  but  to  go  to  work.  The  President  in 
an  address  made  it  plain  that  the  public  treasury  would  not 
be  used  in  giving  out  alms.  This  attitude  was  approved  in 
general  by  press  and  public.  In  Canada,  where  the  English 
idea  of  doles  was  growing,  the  President's  attitude  was 
given  outspoken  approval.  The  Montreal  Gazette  said; 
"The  United  States  is  still  the  most  individualistic  of  the 


HISTORY  OF  BUSINESS  DEPRESSIONS  233 

great  nations,  and  is  likely  to  remain  so.  It  grew  great  by 
the  work  of  men  who,  when  in  need,  turned  to  and  did  what- 
ever their  hands  could  find  to  do.  The  Government's  atti- 
tude may  seem  hard,  but  it  is  in  keeping  with  the  country's 
record.  The  giving  and  taking  of  doles  does  not  make  for 
manliness  or  self-reliance." 

The  President's  conference  was  at  first  inclined  to  out- 
line an  educational  program  to  show  individuals  how  to  pre- 
pare for  their  own  protection  against  recurring  depressions, 
but  Secretary  Hoover  declared  the  Conference  to  be  entrust- 
ed with  the  duty  of  relieving  present  evils  and  doing  some- 
thing of  a  definite  nature  to  relieve  unemployment  and 
help  industry  back  to  its  feet.  The  final  recommendations 
of  the  conference  show  that  this  idea  finally  prevailed. 

In  the  Fall  of  1921,  unfortunately  just  at  the  time  of  the 
Washington  Peace  Conference,  financial  panic  broke  out  in 
China  and  spread  over  the  Republic.  Some  observers  say 
that  Japanese  plotters  instigated  the  panic  for  the  purpose 
of  showing  that  China  was  unable  to  handle  her  own 
financial  affairs  without  help  from  outside.  Whatever 
truth  may  be  in  that  it  is  known  that  China's  Government 
did  default  in  payment  of  loans  to  the  Continental  and  Com- 
mercial National  Bank  of  Chicago.  The  panic  halted,  how- 
ever, before  great  damage  was  done. 

Various  leaders,  among  them  Postmaster-General  Will 
Hayes  and  Secretary  of  Commerce  Herbert  Hoover,  were 
sure  that  prosperity  was  just  around  the  corner  from  1922. 
Others,  such  as  Secretary  of  Agriculture  Wallace,  said  in  a 
speech  in  Chicago  that  the  depression  in  agriculture  was 
the  worst  known  in  history  and  it  would  take  five  years  to 
recover.  Ex-Senator  Beveridge,  before  the  New  York 
Chamber  of  Commerce,  said  that  the  return  of  prosperity 
was  still  a  long  way  off.  If  we  can  go  by  the  past,  however, 
striking  an  average,  we  will  find  that  depressions  run  their 
course  in  two  or  three  years.  Business  has  never  remained 
below  the  normal  line  for  longer  than  three  and  a  half 


234  HISTORY  OF  BUSINESS   DEPRESSIONS 

years.     Our  longest  depressions  were  1837  to  1840,  1873  to 
1876  and  1893  to  1896. 

The  U.  S.  Department  of  Commerce  furnishes  a  table  of 
1921  prices  with  approximate  index  numbers  based  upon 
100  for  1913. 

Cost  of  Living:  Index  Number 

Department  of  Labor    (May  Survey) 180 

National  Industrial   Conference   Board 165 

Average  price  to  producer,  farm  crops 109 

Average  price  to   producer,  live   stock '.  113 

Average    wholesale    price,    foods 152 

^       Average   retail   price,   foods 155 

Wheat  and  Flour: 

Wheat  average  to  producer 128 

Flour,   wholesale,   U.    S.    average 173 

Bre-td.   rcia  I     U.  S.   -average--: 173 

Freight  rate  flour,  Minneapolis  to  New  York,  domestic  187 

Live   Stock  and  Meats: 
Pork- 
Hogs  to  producer 116 

Retail  ham 197 

Retail  sliced  bacon 162 

Wholesale  short  side 108 

Wholesale  pork  chops 184 

Retail  pork  chops 181 

Retail    lard    115 

Beef- 
Cattle,  average  to  producer 91 

Wholesale  carcass  besf  at  Chicago 124 

Retail,  sirloin   steak 157 

Retail,    round __  160 

Retail,    rib    roast    147 

Retail,    chuck    roast    1>30 

Retail,  plate  beef . 112 

W^ees  in  meat  packing  (Dept.  of  Labor  Investigation)  186 

Freight  rates,  dressed  beef,  Chicago  to  Mew  York 214 

Hides   and   Leathers: 

Hide*,    green    salted,    packers,    heavy  native   steers 

rChica*»O    76 

Hides,  calfskin  No.  1,  country,  8  to  15  Ibs  (Chicago)        86 

Leather,  sole,  hemlock,  middle  No.   1    (Boston) 120 

Leather,    Chrome,    calf,  dull   or  bright,   "B"  grades 

(Boston)      195 

Wholesale  boots  and  shoes,  men's  vici  kid,  blucher- 

campella 225 

Freight  rates,  shoes,  Lynn,  Mass..  to  Chicago 210 

Wage  scales  in  shoe  industry  (Massachusetts),  about  200 


235 


Cost  of  Living:  Index  Number 

Cotton : 

To  producer 105 

Yarns,  carded,  white,  Northern  mule,  spun,  22  cones 

(Boston)    107 

Wholesale  sheeting,  brown,  4-4  ware,  shoals  LL,  N.  Y.  118 
Wholesale  printcloth  27  inches,  64  x  60,  7.60  yards  to 

pound    (Boston)    137 

Wool: 

To  producer  92 

Wholesale  worsted  yarns  2-32,  crossbred  stock  white 

in  skein  (Philadelphia).  148 

Wholesale  women's  dress  goods,  storm  serge,  all  wool, 

double  warp,  50  inches,  (New  York) 157 

Wholesale  suitings,  wood-dyed,  blue  55-56,  16  ounces, 

Middlesex  (Boston)  183 

Freight  rate  clothing,  New  York  to  Chicago 210 

Wage  scale  in  mills,  about  200 

Building  and  Construction : 

Prices — 

Lumber,  average  southern  pine  and  Douglas  Fir   (at 

the   mill)    128 

Brick,  average  common,  New  York  and  Chicago 199 

Cemet,  Portland,  net,  without  bags  to  trade  f.  o.  b. 

plank  (Buffington,  Ind.) 175 

Freight  rates — 

Brick,  common,  Brazil,  Ind.,  to  Cleveland,  Ohio 204 

Cement,  Universal,  Pa.,  to  New  York 179 

Building  labor: 

Union  scale,  simple  average,  15  occupations 190 

Union  scale  weighted  average,  8  occupations,  frame 

houses  (3)  197 

Union  scale,  weighted  average,  8  occupations,  brick 

houses  (3) 193 

Common  labor  130 

Construction  costs:  Cement  building  (Aberthaw  Const. 
Co.) 

Coals : 

Price  bituminous,  Pittsburg 186 

Price,  anthracite,  New  York  tidewater 198 

Union  wage  scales  about 173 

Non-union  scale,  about   136 

Freight  rates 187-  209 

Metal  trades,  union  wage  scale:    Simple  average,  19 

occupations    218 


236  HISTORY   OF  BUSINESS   DEPRESSIONS 

Cost  of  Living:  Index  Number 

Metals :    Prices — 

Pig  Iron,  foundry  No.  2,  Northern   (Pittsburgh) 137 

Pig    iron,    Bessemer    128 

Steel   Billets,   Bessemer    (Pittsburgh) 115 

Copper,  ingots  electrolytic,  early  delivery,  New  York  76 

Lead,  pig,  desilverized,  for  early  delivery,  New  York  100 

Zinc,  pig  (spelter) ,  Western,  early  delivery,  New  York  80 

Day  labor,  scale  U.  S.  Steel  Corporation 150 

Printing  and  publishing: 

Book  and  job,  union  wage  scale 194 

Newspaper,   union  wage  scale   157 

Railroad,    average   receipt   per   ton-mile 177 

Bureau  Railway  Economics  estimate  of  railway  wages 
based    on    average    annual    compensation,    third 

quarter    226 

General  estimate  all  union  wage  scales  by  Prof.  Wil- 
son          189 

NOTE — The  wage  indices  refer  mostly  to  wage  scales, 
not  the  earnings,  which  necessarily  depend  upon  regularity 
of  employment. 

The  figures  show  that  agriculture  has  liquidated  to  a 
greater  extent  than  any  other  product,  and  also  that  for 
the  first  time  in  our  history  we  have  gone  through  a  de- 
pression with  commodity  prices  higher  than  the  average 
for  the  preceding  period. 


CHAPTER  XXVI 
MINOR  DEPRESSIONS 

A  number  of  lesser  depressions  affecting  certain  indus- 
tries or  sections  have  occurred  in  the  intervening  years 
which  had  little  effect  on  the  country  as  a  whole,  and  no  les- 
sons are  to  be  gained  from  them  other  than  that  can  be 
gained  from  general  depressions,  so  that  but  brief  space  is 
given  them  here. 

In  1798  the  country  experienced  a  short  panic  and  de- 
pression when  we  were  quarreling  with  France,  who  in- 
sisted that  we  help  her  in  her  war  against  England.  In 
that  year  news  of  Napoleon's  victories  had  reached  England 
and  a  panic  ensued;  it  was  reflected  in  this  country.  The 
prisons  of  Philadelphia  were  filled  with  debtors,  formerly 
honorable  men  of  good  standing.  This  panic  was  soon  over 
and  peace  was  made  with  France. 

There  occurred  in  1828  and  1829  an  accidental  and  very 
brief  scarcity  of  cash.  This  depression  marked  the  begin- 
ning of  the  agitation  against  the  Second  National  Bank, 
causing  uncertainty  in  financial  circles.  The  cry  was  taken 
up  by  an  element  of  politicians  who  wanted  the  State  Bank 
system,  which  they  thought  would  help  more  to  develop  new 
lands  in  the  South  and  West.  Defenders  of  the  National 
Bank  pointed  out  that  its  notes  were  accepted  the  same  as 
gold  in  every  part  of  the  country  and  practically  at  their 
face  value  in  all  the  financial  centers  of  the  world.  The 
parent  bank  at  Philadelphia  was  housed  in  a  marble  palace, 
with  hundreds  of  high-salaried  clerks.  There  were  twenty- 
five  branches  in  different  cities  of  the  Union.  A  large  ex- 
port of  specie  was  taking  place  at  the  time,  and  when  it 
became  known  that  the  volume  of  paper  currency  was  so 
large  against  the  specie  in  the  vaults  of  the  banks  general 


238  HISTORY   OF   BUSINESS   DEPRESSIONS 

distrust  swept  over  the  country.  A  committee  of  the  Sen- 
ate reported  in  1829  that  the  soundness  of  the  bank  was 
unquestioned  and  the  uniformity  of  the  currency  satisfac- 
tory. 

The  crisis  which  occurred  in  1833  was  of  short  duration 
and  felt  but  little  in  business  circles.  It  was  precipitated 
largely  by  the  hostile  attitude  of  President  Jackson  against 
the  United  States  Bank.  The  bank  felt  compelled  to  contract 
its  discounts  suddenly,  causing  confusion  among  borrowers, 
who  quickly  retrenched,  and  the  stringency  was  short  lived. 
At  this  time  President  Jackson  withdrew  the  government 
deposits  from  the  Second  National  Bank.  The  year  1833 
was  one  of  contraction  of  credits  and  decreased  business, 
mostly  on  account  of  uncertainty  and  the  crop  failures  of 
1832,  but  business  soon  emerged  into  the  great  boom  that 
preceded  the  panic  of  1837.  The  expansion  of  the  West 
demanded  so  much  capital  that  there  had  to  be  a  temporary 
let  up,  but  the  West  would  not  down  and  insisted  upon  rid- 
ing ahead  ot  its  fall  in  1837.  When  the  contraction  had  set 
in  Jackson's  friends  led  him  to  believe  that  the  Second  Bank 
was  bent  on  causing  a  prolonged  depression  so  as  to  injure 
his  administration.  Jackson  then  set  about  to  start  good 
times,  and  this  resulted  in  inflation.  Jackson  felt  very 
triumphant  in  that  he  had  forced  the  Second  Bank  to  "aban- 
don the  system  of  curtailment  and  extend  its  accommoda- 
tions to  the  community." 

An  incident  of  this  crisis  was  the  failure  of  the  Bank  of 
Maryland,  then  an  important  institution.  Bitter  feeling 
arose  between  the  directors  and  the  stockholders  and  de- 
positors, and,  after  the  trustees  had  not  rendered  an  ac- 
counting for  seventeen  months,  the  depositors  became  so 
exasperated  that  they  mobbed  the  houses  of  all  the  parties 
concerned  in  the  partnership,  resulting  in  considerable  de- 
struction of  property.  The  mob  held  sway  for  five  days. 
Upon  petition  to  the  Legislature  an  indemnity  of  $102,550 
was  granted  to  those  who  suffered  by  it. 


HISTORY  OF   BUSINESS   DEPRESSIONS  239 

The  year  1851  marked  a  short  period  of  depressed  busi- 
ness described  in  typical  language  by  a  writer  as  follows : 

"A  bad  credit  system  has  been  in  vogue,  trade  with  Cali- 
fornia had  not  met  expectations,  imports  had  been  large, 
exports  of  gold  heavy,  cotton  declined  in  Europe,  the  banks 
contracted,  property  was  sacrificed  to  raise  ready  money, 
mercantile  credit  was  disturbed  everywhere,  and  distress 
was  general  in  all  cities.  In  Wall  Street  large  blocks  of 
stock  were  unloaded  and  the  market  was  broken.  Erie 
went  down  from  90  to  68%.  Later  in  the  month  money  be- 
came easier,  prices  advanced,  and  the  market  resumed  its 
ordinary  aspect." 

The  depression  of  1882  was  inconsequential  and  probably 
a  reflection  of  the  crisis  in  France  of  that  year ;  1867  prob- 
ably also  was  purely  a  reflection  of  the  great  European  crisis 
of  1866. 

A  short  depression  came  in  December,  1895  at  the  time 
of  President  Cleveland's  "Venezuela  Message."  A  panic 
was  precipitated  in  Wall  Street,  and  iron  production 
dropped  off  about  25  per  cent.  The  trouble  passed  over, 
however,  within  a  few  months  and  conditions  returned  to 
normal. 

The  year  1901  witnessed  a  remarkable  performance  in 
Wall  Street.  It  was  the  year  of  the  Northern  Pacific  cor- 
ner, which  dazzled  the  boldest  speculator  that  ever  entered 
the  Street,  and  it  is  now  admitted  that  had  there  been  other 
disturbing  elements  at  the  time  it  would  have  caused  a 
panic  equal  to  that  of  1907.  The  incident  did  not  disturb 
business  as  a  whole,  and  it  is  entitled  to  little  space  here, 
but  Wall  Street  was  severely  shaken  and  many  fortunes 
lost  in  a  single  day,  while  "the  rest  of  the  country  stood  off 
and  literally  laughed." 

The  flurry  of  1900  was  purely  financial  and  did  not 
affect  business.  Industrial  conditions  were  encouraging; 
foreign  commerce  was  expanding,  and  harvests  were 
generous,  so  the  Wall  Street  excitement  reflected  only 
slightly  on  the  rest  of  the  country.  The  year  1918  had  a 


240  HISTORY  OF  BUSINESS  DEPRESSIONS 

breathing  spell  of  about  sixty  days  following  the  armistice, 
when  hundreds  of  thousands  of  workmen  were  let  out  of 
war  industries. 

Other  minor  depressions  or  short  financial  crises  are 
recorded  in  the  years  1846, 1855  and  1882.  Still  other  finan- 
cial panics  have  been  confined  to  Wall  Street  and  had  little 
or  no  effect  upon  the  country,  and  can  not  be  included  in  a 
list  of  business  depressions. 


CHAPTER  XXVII 
OUR  RELATIONS  TO  FOREIGN  DEPRESSIONS 

It  has  been  seen  that  depressions  afflict  other  countries  as 
well  as  the  United  States.  Sometimes  they  are  world-wide, 
at  other  times  they  spread  to  a  group  of  nations,  and  again 
only  one  country  may  be  affected.  In  many  cases  reverses 
in  one  country  spell  profits  to  another.  "It's  an  ill  wind 
that  blows  nobody  good"  is  a  saying  that  obtains  in  the 
world  of  business  and  finance  as  in  everyday  affairs.  A 
general  world  depression  is  the  exception  rather  than  the 
rule,  although  with  the  increasing  intercourse  between  na- 
tions disaster  in  one  has  a  growing  tendency  to  affect  others. 
It  is  claimed  that  the  entire  world  was  passing  through  a 
period  of  lethargy  previous  to  the  recent  war. 

Arnold  Toynbee  in  his  book,  "The  Industrial  Revolution," 
said  that  depressions  in  England  were  generally  associated 
with  bad  harvests,  although  free  trade  had  lessened  their 
force,  because  when  they  had  bad  harvests  there  they  got 
plenty  of  corn  in  America,  but  admitted  that  trade  depres- 
sions were  then  getting  to  be  of  international  scope  and  of 
more  widened  area,  as  "a  bad  harvest  in  Brazil  may  preju- 
dice trade  in  England."  We  have  been  having  business 
cycles  regularly  in  this  country  ever  since  we  have  been  a 
nation,  and  England  has  had  them  ever  since  the  beginning 
of  the  mercantile  period.  In  former  years  crises  in  England 
developed  into  the  worst  kinds  of  panics,  until  in  1866  they 
developed  a  plan  of  panic  financiering.  This  included  the 
adoption  of  a  centralized  banking  system,  the  vital  feature 
of  which  was  to  give  practical  assurance  that  every  business 
enterprise  not  actually  insolvent  can,  by  paying  a  stiff  rate 
of  interest,  obtain  bank  loans  to  meet  its  liabilities.  This 
act  tended  to  stave  off  panicky  runs  and  retain  an  element 


242  HISTORY  OF  BUSINESS   DEPRESSIONS 

of  confidence  in  business  and  finance,  no  matter  how  dark 
the  outlook.  It  is  true  that  England  has  had  crises  since 
this  time,  but  they  have  lost  their  dramatic  intensity  and 
the  nation  has  come  through  some  very  trying  times,  while 
the  system  held  true.  England  was  fifty  years  ahead  of  us 
in  taking  steps  to  avert  panics.  Our  Federal  Reserve  Act, 
no  doubt,  kept  us  from  having  a  panic  in  1920,  and  will 
probably  be  a  bulwark  against  them  in  the  future.  How- 
ever, we,  like  England,  will  for  some  time  have  recurring 
business  depressions,  and  since  we  are  now  practically  se- 
cure from  panics  our  thought  should  next  be  developed  into 
mitigating  the  violence  of  deflation  and  resulting  depression. 
We  have  been  affected  by  England's  crises  and  depressions 
and  she  by  ours,  more  than  any  other  two  countries,  be- 
cause of  the  close  inter-relationship  of  our  financial  and 
commercial  systems.  Seldom  have  we  felt  the  effects  of  a 
foreign  depression  other  than  England's,  unless  it  was  in 
1884.  This,  some  think,  was  a  reflection  from  France's 
trouble  of  1882.  We  have,  however,  felt  world-wide  depres- 
sions along  with  most  all  other  countries. 

In  the  early  part  of  the  Nineteenth  Century,  from  the 
years  1801  to  1804,  France  suffered  a  financial  reaction.  The 
most  important  reason  for  this  was  no  doubt  the  disturb- 
ance caused  by  the  continual  wars  in  which  she  had  been 
engaged,  both  foreign  and  internal,  rendering  the  .paths  of 
industry  precarious  in  the  extreme.  ,  During  these  years 
America  prospered  from  supplying  the  warring  nations  of 
Europe. 

The  depression  of  1819  was  general  in  all  the  western 
world  because  of  a  general  crash  following  the  Napoleonic 
wars.  It  spread  to  America.  Our  1825  depression  was 
nothing  but  a  reflection  of  the  English  and  French  crises 
and  depressions  of  that  year.  Our  domestic  situation  was 
sound  and  it  had  little  effect  upon  us.  India  had  notable 
depressions  around  the  years  1830  and  1866.  We  felt 
neither  of  them.  In  October,  1836,  a  financial  crisis  over- 


HISTORY  OF  BUSINESS   DEPRESSIONS 


243 


whelmed  Great  Britain.  While  our  panic  a  year  later  cannot 
be  wholly  and  definitely  attributed  to  the  crisis  in  England, 
yet  one  had  considerable  bearing  on  the  other. 

In  1841  Great  Britain  experienced  a  financial  crisis  which 
brought  many  failures  among  mercantile  houses  and  wide 
distress  among  the  working  classes,  but  had  no  effect  on 
this  country. 

In  recent  years,  up  to  the  Great  War,  Germany  has  been 
very  fortunate  in  avoiding  serious  commercial  depressions. 
She  had  suffered  very  severe  financial  reverses  from  the 
revolutionary  movements  in  1848  and  the  various  disturb- 
ances as  an  outgrowth  of  quarrels  in  welding  the  various 


110 
8 


I860  1870 

2     4     6     a 


2 
100 

a 

6 

4 
2 

90 
a 

6 
4 

2 

60 
e 

6 

4 
2 

70' 

8 
6 

.4 

2 

60 


I860  .  1890  1900  1910  1920 

4     6     S  £460  £4608468846     • 


V 


Prices  of  English  Food  Commodities  as  a  Whole  Since  I860.  Prices, 
Reached  a  Lower  Level  Throughout  the  World  in  the  Depression  of 
1893-4  than  for  a  century  previous.  The  Comparatively  Low  Level  of 
the  War  Period  1914-1918  was  Due  to  the  Government  Purchases  of 
Food  Stuffs  That  Were  Sold  to  the  People.  Below 'Cost. 


244  HISTORY   OF  BUSINESS   DEPRESSIONS 

states  together.  Her  crisis  of  1848  was  echoed  in  this  coun- 
try. After  the  lull  following  the  Franco-Prussian  War  she 
went  forward  in  great  strides,  few  depressions  of  wide- 
spread consequence  being  recorded.  The  story  of  the  growth 
of  Hamburg  compares  well  with  that  of  the  great  and  rapid 
rise  in  Chicago. 

The  crisis  of  1857  affected  England  and  America.  In 
1864  Brazil  and  Australia  were  both  affected  by  severe 
business  depressions,  neither  of  which  were  felt  in  America. 
That  of  1873  swept  over  the  continents  of  North  and  South 
America  and  Europe.  Silver  was  very  high  and  the  amount 
of  silver  in  a  silver  dollar  was  worth  several  cents  more  than 
par.  When  great  quantities  of  German  silver  were  dumped 
onto  our  market  at  these  prices,  a  tremendous  decline  set 
in,  augmenting  the  already  precarious  state  of  affairs,  merg- 
ing into  the  general  panic. 

In  1886  Great  Britain  appointed  a  Royal  Commission  on 
Depression  in  Trade,  which  carried  on  an  extensive  investi- 
gation of  underlying  conditions.  Our  depression  of  1884 
was  over  by  that  time.  All  of  South  America  was  affected 
in  the  troubles  of  1890.  The  difficulties  centered  in  Argen- 
tine, quickly  spreading  to  other  Latin-American  nations, 
thence  to  Europe,  causing  the  Baring  failure  in  England, 
and  finally  to  America.  Our  depression  of  1893,  terrible 
as  it  was,  affected  us  almost  alone.  India  had  a  panic  and 
depression  that  year,  though  it  probably  bore  no  relationship 
to  ours,  except  the  re-echo  of  the  demonetization  of  silver  in 
that  country.  Acute  commercial  conditions  also  existed  in 
far-away  Java  and  the  Straits  Settlements  in  1893.  In 
1907  the  whole  world,  including  the  Orient,  felt  the  crisis. 
It  seriously  affected  business  in  Latin-America.  At  the  out- 
break of  the  World  War  in  1914  every  country  on  the  globe 
was  affected  for  at  least  a  year.  Again  in  1920  scarcely 
any  country  escaped. 

Our  depression  of  that  year  followed  the  severe  Japanese 
panic,  which  caused  numerous  failures  on  the  Pacific  Coast 


245 


of  our  country.  A  depression  had  also  set  in  in  England 
and  Italy  and  to  some  extent  in  France.  On  the  other  hand, 
Germany  and  Belgium  were  prosperous — Germany  be- 
cause her  people  were  going  back  to  work,  willingly  taking 
depreciated  money;  Belgium  because  the  first  Germany  in- 
demnity payments  went  to  her. 

There  have  always  been  small  local  depressions  in  the  dif- 
ferent countries  and  depressions  affecting  individual  in- 
dustries in  a  single  country.  But  it  can  be  seen  that  as  the 
nations  of  the  world  engage  more  and  more  in  commercial 
intercourse  the  major  depressions  of  the  future  are  bound, 
to  some  extent,  to  affect  them  all. 

YEARS  OF  DEPRESSION  IN  UNITED  STATES  AND  OTHER 
COUNTRIES. 

Other  countries  mentioned  had  various  depressions  not 
noted  here.  Those  are  given  which  had  relationship  to  our 
own. 


United  States 

England 

1785 

1808 

1808 

1814 

1819 

1819 

1825 

1825 

1837 
1848 

(1836) 

1857 
1860 
1869 

1857 

1873 

1873 

1884 

1890 

1890 

France 
1785 
1808 

1819 
1825 


Other  Countries 
Ireland,   Holland. 
Entire  Europe. 


1903 
1907 

1914 
1920 


(1902) 
1907 


1920 


1848          Germany,  Austria* 


Austria,    Russia, 
Latin-America. 

Latin- America, 
Germany,      Tur- 
key, India,  Java, 
Australia. 

Orient,  Europe, 
Latin  America. 

Entire  world, 
except  Europe. 

Entire  world.     . 


1907 


1920 


CHAPTER  XXVIII 
CAUSES  OF  DEPRESSIONS 

Theoretical  Causes. — In  the  early  part  of  the  Eighteenth 
Century  British  merchants  and  financiers  spent  much  time 
worrying  over  their  relative  cash  basis  as  compared  with 
other  countries,  and  sometimes  studied  that  matter  so  in- 
tensely that  they  lost  all  sense  of  the  real  proportion  of 
things,  and  thought  that  the  nation  was  being  ruined  be- 
cause the  importation  of  gold  and  silver  was  hindered  or 
stopped.  Wise  old  Joshua  Gee,  who  wrote  (1730)  "The 
Trade  and  Navigation  of  Great  Britain  Considered,"  ended 
his  book  with  this  paragraph:  "The  trade  of  a  Nation  is 
of  Mighty  Consequence,  and  a  thing  that  ought  to  be  se- 
riously weighed,  because  the  Happiness  or  Misfortunes  of 
so  many  Millions  depend  upon  it.  A  Little  Mistake  in  the 
Beginning  of  an  Undertaking  may  swell  to  a  very  great  one. 
A  Nation  may  gain  vast  Riches  by  Trade  and  Commerce,  or 
for  want  of  due  Regard  and  Attention  may  be  drained  of 
them.  I  am  the  more  willing  to  mention  this  because  I  am 
afraid  the  present  Circumstances  of  ours  carries  out  more 
Riches  than  it  brings  home.  As  there  is  cause  to  apprehend 
this,  surely  it  ought  to  be  look'd  into ;  and  the  more,  since 
if  there  be  a  wound,  there  are  Remedies  proposed,  which, 
if  rightly  applied,  will  make  our  Commerce  flourish  and  the 
Nation  happy."  He  had  studied  the  trade  for  the  year 
1723,  and  had  found  that  he  could  trace  the  export  of  more 
than  a  hundred  and  seventy  tons  of  silver  and  about  eleven 
tons  of  gold.  In  another  place  he  says,  "yet  so  Mistaken 
are  many  people,  that  they  cannot  see  the  Difference  be- 
tween having  a  vast  treasure  of  Gold  and  Silver  in  the 
Kingdom,  and  the  Mint  employed  in  coining  money,  the 
only  true  token  of  Treasure  and  Riches,  and  having  it  car- 


HISTORY  OF  BUSINESS   DEPRESSIONS  247 

ried  away;  but  they  say  Money  is  a  Commodity  like  other 
Things,  and  think  themselves  never  the  poorer  for  what  the 
Nation  daily  exports." 

Investigation  of  trade  cycles  and  causes  of  depression 
bring  on  an  interesting  study.  In  late  years  it  has  been 
demonstrated,  notably  in  1901,  1905  and  other  instances, 
that  Wall  Street  can  have  a  regular  old-fashioned  panic 
and  the  rest  of  the  country  go  on  unaffected  to  any  degree. 
Such  might  be  called  "financial  hysteria"  and  be  confined 
to  the  "Street."  On  the  other  hand,  we  may  have  business 
depression,  such  as  came  in  1914,  resulting  from  uncer- 
tainty due  to  the  outbreak  of  the  European  war.  At  that 
time  Wall  Street  prospered  by  making  foreign  loans  at 
usurious  rates,  while  the  business  of  the  rest  of  the  country 
was  stagnant.  Wall  Street  panics  are  usually  brought 
about  by  the  selling  of  securities  by  holders  who  feel  that 
the  peak  has  been  reached,  particularly  when  some  unto- 
ward instance  happens  which  might  look  like  a  setback  was 
ahead.  A  large  number  of  sellers  appearing  at  the  same 
time  naturally  causes  the  market  to  recede.  A  few  days 
of  sharp  drops  causes  the  holder  to  become  frightened  and 
a  general  unloading  ensues,  and  the  legitimate  investor 
often  follows  the  speculator,  but  too  late.  By  the  time  he 
has  awakened  to  the  fact  that  a  genuine  stock  panic  is  on 
the  value  has  sagged  considerably.  Such  declines  are 
caused  by  or  are  followed  by  stringency  in  the  money  mar- 
ket, and  others  are  forced  to  sell  because  their  margins  are 
exhausted.  The  decline  continues  with  disastrous  effects 
until  a  point  is  reached  where  many  times  the  stock  becomes 
an  actual  bargain  and  it  is  picked  up  by  that  element  of  for- 
tunate people  who  always  have  money  through  steady  in- 
comes or  are  able  to  borrow  under  any  circumstances. 

A  friend,  during  a  game  of  cards  where  the  luck  of  the 
players  was  going  bad,  used  to  say:  "Never  mind,  your 
luck  will  change  bye  and  bye — and  get  worse."  That  well 
describes  some  of  the  depressions  we  have  had.  The  de- 


248  HISTORY  OF  BUSINESS   DEPRESSIONS 

pression  of  1848  did  not  follow  any  particular  period  of 
inflation  or  expansion,  but  came  on  during  very  normal 
times.  Likewise  the  depression  of  1884.  The  depression  of 
1893  also  followed  a  period  of  six  years  which  were  below 
normal  rather  than  above  normal.  In  other  words,  bad 
times  got  worse.  A  class  of  economists  hold  to  the  doc- 
trine that  trade  cycles  follow  the  fluctuations  of  precious 
metals.  They  attempt  to  explain  that  scarcity  of  gold  means 
retrenchment  and  a  stagnation,  and  that  a  great  output 
of  gold  brings  expansion  and  prosperity.  How,  then,  do 
they  explain  the  depression  of  1920  in  the  United  States, 
which  had  over  half  the  world's  gold,  and  a  depression  of 
equal  volume  in  Great  Britain,  which  had  the  next  largest 
gold  reserve,  as  against  the  unprecedented  prosperity  in 
Germany,  which  had  very  little  gold?  Another  school  of 
writers  claims  that  depressions  are  caused  by  unsound 
money,  in  the  form  of  too  large  coinage  and  circulation  of 
silver.  That  theory  has  been  generally  accepted  in  this 
country  because  of  the  unfortunate  experiences  we  have 
had  with  silver  money.  But,  on  the  other  hand,  we  can 
point  to  many  countries  that  are  and  always  have  been  on  a 
silver  basis,  and  they  have  suffered  less  from  severe  depres- 
sion than  have  we  in  this  and  other  gold  standard  nations. 
The  money  of  Spain,  known  as  a  silver  country,  brought  a 
premium  during  the  World  War,  and  on  the  western  conti- 
nent up  through  history  Spanish  silver  money  has  always 
been  at  par  and  usually  brought  a  premium.  Thomas  Jeffer- 
son favored  putting  this  country  on  a  silver  basis,  pattern- 
ing our  currency  after  the  Spanish  coins,  which  circulated 
freely  and  were  in  great  demand  in  some  of  the  colonies  for 
thirty  years  after  the  Revolution.  The  examination  of  finan- 
cial history  shows  that  there  is  no  reasonably  close  relation 
between  depression  and  the  output  of  precious  metals, 
either  gold  or  silver.  It  is  known  that  the  decade  ending 
with  1850  shows  the  output  of  gold  doubled,  compared  with 
the  previous  ten  years,  yet  that  decade  was  marked  the 


HISTORY  OF   BUSINESS   DEPRESSIONS  249 

world  over  by  financial  reaction.  Our  panics  of  1857,  1873 
and  1907  all  occurred  during  periods  when  there  was  a 
great  inflow  of  new  gold. 

Still  again  there  is  another  group  that  sticks  to  the  money 
question  as  the  root  of  the  depression  evil.  These  probably 
come  nearer  to  a  correct  diagnosis  than  the  others. 

The  issuance  of  paper  money  of  unsound  backing  has  un- 
doubtedly caused  several  serious  depressions.  The  use  of 
this  money  led  to  extravagance,  over-expansion  and  wild 
speculation,  so  that  a  halt  was  bound  to  come.  The  issuance 
of  paper  money  within  reason  as  a  circulating  medium  is 
necessary.  We  are  so  used  to  paper  money  that  in  these 
days  the  tendering  of  a  silver  dollar  causes  curiosity  if  not 
resentment.  We  have  already  entered  the  Paper  Age.  We 
are  reaching  a  point  where  we  realize  there  is  something 
of  basic  and  intrinsic  value  in  the  world  besides  gold  and 
silver.  These  metals  may  always  be  used  as  a  basis  of 
money  issues  simply  because  of  their  rarity,  but  they  will 
grow  less  and  less  in  importance.  The  Bolshevists  of  Rus- 
sia tried  the  age-old  theory  that  money  is  unnecessary,  and 
they  will  find  to  their  own  surprise  and  to  our  chagrin  that 
they  are  half  right.  When  we  are  further  along  money 
will  be  necessary  only  as  a  paper  medium  to  represent  rec- 
ognized essentials  of  mankind  upon  which  it  will  be  based. 
Our  Federal  Reserve  Act  provides  that  we  may  issue  paper 
money  on  something  besides  gold  and  silver  and  the  notes 
still  be  more  than  a  mere  promise  to  pay.  Our  Federal  Re- 
serve notes  are  based  on  certain  approved  securities  which 
are  far  more  necessary  to  the  progress  and  welfare  of  man- 
kind than  gold  and  silver.  True,  these  notes  are  redeemable 
in  gold,  but  it  is  well  known  that  the  issues  outstanding  are 
ten  to  twenty  times  as  great  as  the  gold  reserve  back  of 
them.  As  we  go  along  the  Federal  Reserve  Act  will  proba- 
bly be  so  amended,  and  at  the  same  time  strengthened,  that 
our  money  will  represent  the  accumulated  wealth  of  our 


250  HISTORY   OF  BUSINESS  DEPRESSIONS 

brains  and  our  toil,  which  is  the  finest  intrinsic  value  that 
God  has  created. 

There  have  been  minor  depressions  in  our  country  that 
are  really  hard  to  analyze,  with  no  apparent  causes.  In  the 
case  of  our  major  depressions,  however,  the  causes  may  be 
well  defined.  At  different  times  various  governments  have 
attempted  to  analyze  depressions  and  if  possible  find  a 
remedy.  Among  these  are  the  United  States,  Great  Britain, 
France,  Belgium,  Germany,  Switzerland  and  Italy.  A  va- 
riety of  causes  have  been  advanced  by  scores  of  writers, 
economists,  investigators,  financiers  and  business  men. 
Some  are  old  and  have  been  eliminated  by  the  march  of  time. 
Some  are  obviously  of  little  consequence,  while  others  are 
very  apparent  causes  and  these  are  defined  later.  Among 
the  causes  that  have  been  advanced  at  different  times  are : 

Underconsumption. 

Large  Exportations  of  Gold. 

Large  Importations  of  Goods. 

Effects  of  Fear  of  the  Tariff. 

Weak  Banking  Systems. 

Presidential  Elections. 

Unpopular  Taxation. 

Lack  of  Foreign  Markets. 

Unemployment. 

Want  of  Confidence. 

Inflation  of  Values. 

Variation  in  the  Cost  of  Production. 

Unpopular  Legislation. 

Unreasonably  High  Prices. 

Centralization  of  Capital. 

Manipulation  of  Money  Power. 

Depreciation  of  Currency. 

Withdrawal  of  Money  from  Circulation. 

Contraction  of  Currency. 

Inflation  of  Currency. 

Suspension  of  Specie  Payment. 


251 

Disturbed  Value  of  Gold  and  Silver. 

Lack  of  Fixed  Policy  in  Governmental  Affairs. 

Extravagance,  Public  and  Private. 

Inefficiency  of  Labor. 

Large  Immigration  of  Pauper  Labor. 

Speculation. 

Depressed  Value  of  Farm  Products 

Exhorbitant  Transportation  Costs. 

Artificial  Stimulation. 

Timidity  on  the  Part  of  Money  Lenders. 

Bank  Failures. 

Conflicts  between  Capital  and  Labor. 

Buyers'  Strikes. 

Enforced  Economy,  Public  and  Private. 

Starting  Needless  Enterprises. 

Political  Distrust. 

At  different  times  various  causes,  more  or  less  absurd, 
have  been  ascribed,  many  of  them  of  course  having  little 
bearing  on  the  question.     Among  them  are : 
"Withholding  Franchise  from  Women." 
"Want  of  Training  of  Girls  for  Future  Duties." 
"Faulty  Laws  Relative  to  the  Guardianship  of  Children." 
"The  Custom  of  Issuing  Free  Railroad  Passes." 
"High  Telegraph  Rates." 
"The  Use  of  Tobacco." 

Professor  Frederickson,  of  the  University  of  Copenhagen, 
earnestly  believed  his  theory  that  depressions  "were  due  to 
the  minds  of  men"  or  the  result  of  "mental  process." 

Many  of  these  theories  have  been  disproved,  as  for  in- 
stance, that  relative  to  the  exportations  of  gold.  Let  us  refer 
to  the  case  of  the  French  nation,  which  in  1871  paid  Ger- 
many a  large  indemnity  in  gold.  Yet  depression  followed  in 
Germany  in  two  years,  while  times  were  normal  or  good  in 
France. 

Sun  Spots. — Some  years  back  Professor  Jevons  advanced 


252  HISTORY   OF  BUSINESS   DEPRESSIONS 

a  theory  which  attracted  considerable  attention  and  many 
believers,  viz.,  that  cycles  of  depression  followed  the  appear- 
ance of  sun  spots.  He  sought  to  prove  that  sun  spots  oc- 
curred in  the  history  of  England  during  the  dates  of  her  fi- 
nancial crises  which  he  named  as  1701,  1711,  1731,  1742, 
1752,  1763,  1772,  1783,  1793,  1804,  1815,  1825,  1836,  1847, 
1857,  1866,  1878.  In  seeking  an  explanation  of  this  strange 
coincidence  the  Professor  claimed  that  sun  spots  caused  de- 
fective harvests  which,  in  turn,  brought  on  industrial  disas- 
ter. Both  astronomists  and  biologists,  however,  failed  to 
agree  with  the  Professor  and  the  theory  has  long  since  been 
discarded. 

Over-Population. — It  has  been  held  in  Europe  for  some 
time  that  depression  was  caused  by  over-population;  that 
there  was  not  sufficient  employment  and  too  many  had  no 
buying  power.  Yet  we  have  had  depressions  in  America  of 
still  greater  severity  when  the  country  was  sparsely  settled 
and  even  now  it  certainly  cannot  be  said  that  this  country 
is  over-populated. 

Over-Production. — The  cry  of  over-production  goes  up, 
particularly  among  theorists,  as  a  cause  of  business  depres- 
sion. Yet  there  has  never  been  a  time,  even  in  our  most 
prosperous  years,  when  there  were  not  thousands  in  need 
who  would  gladly  give  labor  or  its  equivalent  for  the  very 
articles  that  were  claimed  to  be  over-produced.  Mafty 
students  of  economy  laid  the  distress  of  1920  to  over-pro- 
duction, as  was  the  case  in  many  previous  depressions.  This 
was  a  quick  change  of  front  from  a  year  preceding,  when 
all  the  professional  economists  told  us  that  we  must  have 
greater  production  in  order  to  relieve  high  prices  and  profi- 
teering. In  1919,  in  the  face  of  the  fact  that  prices  were 
then  outrageous,  salesmen  went  up  and  down  the  country 
with  the  stereotyped  phrase  that  they  were  doing  the  cus- 
tomer a  favor  by  selling  at  prices  quoted  and  that  the  next 
order  would  cost  more  because  prices  were  sure  to  rise  still 
higher.  They  claimed  there  was  an  under-production  and 


HISTORY  OF  BUSINESS  DEPRESSIONS  253 

that  raw  material  and  labor  could  not  be  obtained  to  supply 
the  demand.  Then  came  the  buyers'  strike,  and  almost  over 
night  we  switched  the  blame  for  our  predicament  from 
under-production  to  over-production.  Over-production  is 
responsible,  more  or  less,  for  our  temporary  depressions  and 
set-backs,  yet  that  is  a  wrong  diagnosis  of  the  primary 
causes  for  the  sickness  of  America  in  1920.  Stimulated  by 
universal  demand  manufacturers,  and  farmers  in  particular, 
produced  abundantly.  Of  most  commodities  we  always  have 
a  surplus,  and  what  surplus  we  had  could  easily  have  been 
taken  care  of  had  international  finances  been  anywhere 
near  normal.  Foodstuffs  were  rotting  in  this  country  while 
China  and  half  of  Europe  were  starving.  Europe  also  had 
urgent  need  of  the  products  of  our  mines  and  mills,  and  our 
surplus  would  ordinarily  have  been  shipped  there  had  not 
their  finances  been  strained  to  the  breaking  point. 

We  had  a  surplus,  not  from  any  cause  of  over-production, 
but  because  of  our  time-worn  custom  of  producing  a  surplus, 
and  the  use  of  the  word  "surplus"  in  this  connection  gives 
the  unthinking  man  an  entirely  erroneous  impression,  for 
it  gets  the  cart  before  the  horse.  It  implies  that  foreign 
trade  is  a  device  to  get  rid  of  a  surplus  product,  whereas 
the  so-called  "surplus"  was  brought  into  existence  because 
of  the  demand  originally  created  by  foreign  trade. 

Excessive  Saving. — Several  writers  have  come  forth  with 
articles  taking  the  stand  that  excessive  saving  is  a  cause 
of  depression.  These  writers  put  forth  earnest  efforts  to 
show  the  fallacy  of  saving,  but  their  arguments  are  without 
merit.  We  know  that  money  saved  is  not  taken  out  of  cir- 
culation at  all,  but  the  savings  institutions  lend  it  to  bor- 
rowers and  it  is  put  to  work  in  production  just  as  if  the 
original  owner  had  spent  it.  The  only  time  the  question  of 
excessive  saving  might  enter  into  depressions  is  when  the 
depression  is  at  its  height.  When  banks  are  liquidating  to 
an  extreme  and  people  are  saving  to  an  extreme,  a  bad  situ- 
ation is  certain  to  be  created. 


254 

The  solution  is  that  people  must  save  more  in  good  times 
and  the  banks  must  lend  more  in  bad  times. 

Foreign  Investments. — We  are  facing  today  a  new  situa- 
tion that  might  in  the  future  be  agitated  as  a  cause  of  de- 
pression in  this  country.  This  factor  is  the  large  investment 
of  American  capital  in  foreign  countries.  English  econo- 
mists of  fifty  and  a  hundred  years  ago  complained  that  their 
industrial  conditions  were  depressed  because  of  enormous 
investments  of  British  capital  in  foreign  countries.  No 
doubt  that  did  drain  England  of  money  for  the  time  being, 
although  in  later  years  those  investments  were  a  source  of 
great  wealth  to  England.  It  is  easily  possible  to  see  that 
in  this  country  the  matter  of  foreign  investments  can  be 
overdone,  bringing  temporary  detriment  to  business  in  this 
country.  Some  insist  that  we  are  still  a  new  country,  that 
in  every  locality  there  are  great  possibilities  for  develop- 
ment and  a  need  for  investment  capital.  Yet  enormous  sums 
of  American  wealth  during  the  depression  of  1920  and 
1921  were  invested  in  buying  the  Hapsburg  estates  in  Aus- 
tria and  Hungary,  in  South  American  oil  fields,  in  Russian 
concessions,  in  Cuba,  Mexico  and  the  Orient.  It  is  pointed 
out  that  these  investments  were  necessary  to  secure  future 
supplies  of  oil,  rubber  and  other  raw  materials,  and  prob- 
ably we  missed  the  money  less  in  1920  and  1921  than  we 
would  in  normal  times,  because  of  the  great  wealth  poured 
into  this  country  during  the  war.  Most  of  these  investments 
were  made  as  a  result  of  exchange  of  loans  already  owed  us, 
and  will  no  doubt  benefit  us  in  future  years.  In  1846  John 
MacGregor  in  his  "Commercial  Statistics"  described  the 
condition  of  Holland  during  the  progress  of  her  decline.  He 
called  attention  to  the  fact  that  a  great  part  of  her  specie 
and  capital  was  then  being  diverted  into  investments  in 
the  manufacturing  trade  and  securities  of  foreign  countries, 
which  permanently  exhausted  and  weakened  the  power  and 
energy  of  Holland.  It  was  soon  found  that  where  a  man's 
money  went  he  eventually  followed,  so  that  not  only  the 


HISTORY  OF  BUSINESS   DEPRESSIONS  255 

money  but  the  life  blood  of  Holland  went  to  other  countries; 
not  only  to  her  colonies,  some  of  which  she  later  lost,  but  to 
many  other  countries.  American  investments  abroad  may 
not  cause  our  best  business  men  to  follow,  but  unless  it  is  a 
gradual  process  it  is  certain  to  be  reflected  in  our  domestic 
industrial  welfare. 

Falling  Prices, — CarrollD.  Wright,  former  United  States 
Labor  Commissioner,  gives  falling  prices  as  one  of  the 
chief  causes  of  depressions.  His  report  made  in  1886  on 
this  subject  is  interesting  and  shows  thorough  investigation 
of  a  practical  nature. 

As  a  cause  of  depression  falling  prices  is  secondary,  be- 
cause they,  in  turn,  are  brought  about  by  more  fundamental 
causes.  Rising  prices  have  a  psychological  effect.  They 
stimulate  hope  and  courage,  whereas  falling  prices  cause 
caution,  fear  and  depression.  Falling  prices  may  follow  a 
linancial  crisis  or  may  precede  a  general  depression.  In 
1920-21  the  depression  could  have  been  largely  avoided  if 
prices  could  have  been  gradually  reduced  in  proportion  to 
a  decline  in  cost  of  production.  In  such  a  sharp  fall  of  prices 
as  we  have  recently  witnessed  great  losses  must  take  place 
and  depression  will  follow  until  these  losses  can  be  made  up 
or  overcome.  Low  prices  naturally  bring  depression  in 
values  of  property  and  stocks  on  hand. 

Mr.  George  Grubb,  National  Secretary  of  the  Marine 
Engineers'  Association,  claimed  the  depression  was  brought 
about  by  a  concerted  effort  of  employers  who  wanted  to 
squeeze  labor.  No  doubt  there  was  a  general  desire  on  the 
part  of  employers  to  discipline  labor  because  of  alleged  in- 
efficiency, although  no  evidence  is  at  hand  to  show  that  this 
movement  was  organized.  If  it  is  true  that  the  depression 
was  deliberately  brought  about,  which  is  extremely  doubtful, 
then  the  employers  badly  mismanaged  matters  when  they 
let  the  movement  get  away  from  them.  It  is  certainly  plain 
that  the  employers  lost  enormous  sums  of  money  when  the 
buying  power  of  millions  of  workers  was  curtailed,  as  well 


256  HISTORY   OF   BUSINESS   DEPRESSIONS 

as  through  the  depreciated  value  of  their  own  enterprises 
arising  from  curtailed  earning  power.  For  instance,  a 
manufacturing  institution  might  easily  be  worth  a  million 
dollars  as  a  going  concern,  if  its  output  is  being  consumed 
and  it  is  earning  healthy  dividends.  Yet  it  is  also  possible 
that  the  value  of  that  same  plant  might  depreciate  to  half 
that  amount  through  lack  of  orders,  stringent  credits,  de- 
creased earnings  and  disorganized  employees.  In  the  face 
of  these  facts  what  would  the  employer  gain  by  a  concerted 
movement  to  shut  down?  Thus  decreased  earning  power 
will  cause  falling  prices  entirely  outside  of  the  natural  order 
of  supply  and  demand. 

Changes  which  take  place  in  the  prices  of  commodities 
may  be  due  either  to  changes  which  affect  the  commodity 
only  or,  since  price  is  the  relation  of  the  commodity  to  money, 
to  changes  which  take  place  in  the  value  of  money.  Change 
in  price  may  therefore  arise  from  a  change  in  (1)  the  de- 
mand for,  or  (2)  the  supply  of  the  commodity.  Changes  of 
this  nature  are  reflected  in  the  prices  of  one  commodity  as 
compared  with  another;  their  positions  in  the  price  scale 
change.  It  may  be  noted  that  when  prices  change  "by  rea- 
son of  differences  in  the  demand  for,  and  the  supply  of 
commodities,  some  commodities  may  rise  in  price  while 
others  fall.  Such  readjustments  in  prices  of  commodities 
are  constantly  taking  place.  On  the  other  hand,  should 
price  changes  be  wrought  by  changes  in  the  value  of  money 
we  should  expect  uniform  action  upon  prices — a  general 
rise  of  prices  or  a  general  fall. 

"The  study  of  prices  has  long  been  a  subject  of  particular 
solicitude,  not  only  to  the  men  actually  engaged  in  business 
but  to  the  students  of  business  affairs.  To  separate  the 
general  from  the  particular,  economists  have  invented  what 
is  known  as  the  index  number.  The  purpose  of  this  device 
is  to  ascertain  the  average  change  in  prices  of  a  group  of 
commodities.  The  prices  of  a  given  period  or  a  given  time 
are  selected  as  a  base,  and  the  price  of  each  commodity 


HISTORY  OF  BUSINESS   DEPRESSIONS  257 

is  determined,"  says  Joseph  French  Johnson,  dean  of  New 
York  University  School  of  Commerce,  Accounts  and 
Finance,  who  tells  in  "Economics  of  Business"  how  the 
method  of  tabulation  arrives  at  a  scientific  price  barometer. 
"The  advantage  of  taking  as  a  base  the  average  price  for 
a  series  of  years  is  that  this  course  makes  it  possible  to 
eliminate  as  far  as  possible  the  influence  which,  in  a  shorter 
period,  Unusual  conditions  might  have  had  on  the  price  of 
a  particular  commodity.  When  the  base  price  is  ascertained 
other  prices  during,  before  and  after  the  period  of  the  base 
are  expressed  as  percentages  of  this  base.  Commodities  A, 
B,  C  and  D  will  each  have  a  diiferent  base,  but  when  the 
base  is  turned  into  a  percentage  it  becomes  uniform  for  all, 
namely,  100.  We  may  suppose  that  at  a  later  period  A  is 
represented  by  110,  B  by  106,  C  by  102  and  D  by  98.  Now, 
if  these  figures  be  averaged  the  result  is  104,  and  this  repre- 
sents for  the  group  an  average  rise  in  price  of  4  per  cent 
over  the  base.  One  of  the  commodities  indeed  declined  in 
price,  but  this  does  not  alter  the  fact  that  the  general  ten- 
dency is  to  advance  the  price.  In  following  the  method, 
briefly  indicated,  of  constructing  an  index  number,  each 
article  has  been  given  an  equal  importance  in  determining 
the  change.  If  instead  of  abstract  designations,  A,  B,  C 
and  D,  concrete  articles  had  been  named,  such  as  wheat, 
iron,  wool  and  indigo,  there  might  be  some  doubt  as  to  the 
propriety  of  giving  each  an  equal  importance  in  fixing  the 
result.  To  avoid  such  questionings  various  methods  have 
been  devised  to  give  an  appropriate  weight  to  the  different 
articles,  such  weights  being  arranged  in  accordance  with 
the  foreign  trade,  or  with  the  estimated  national  consump- 
tion, or  the  expenditure  of  workingmen's  families." 

None  of  these  highly  complicated  methods  have,  how- 
ever, led  to  substantially  different  results  from  the  simple 
arithmetical  average.  It  is  clear  that  if  each  article  moved 
upward  in  price  exactly  5  per  cent  it  would  not  matter  how 
many  articles  were  added  to  the  list  or  how  they  were  com- 


258  HISTORY  OF  BUSINESS  DEPRESSIONS 

bined,  and  one  could  not  get  any  other  general  result  than 
a  5  per  cent  advance.  If  some  articles  increased  4  per  cent 
and  others  6  they  would,  if  equally  divided,  show  an  aver- 
age of  5  per  cent,  but  no  method  of  combination  could  make 
the  advance  less  than  4  or  more  than  5  per  cent.  In  other 
words,  in  a  group  of  prices  the  general  tendencies  outweigh 
the  particular  ones,  and  no  combination  of  different  results, 
according  to  any  plausible  system  of  weighing,  will  empha- 
size the  particular  tendencies  at  the  cost  of  those  which  are 
general. 

Economists  agree  that  there  is  not  a  level  of  prices, 
whether  it  be  high  or  low,  which  causes  either  prosperity 
or  distress,  but  it  is  the  conditions  brought  about  by  either 
that  brings  the  need  of  readjustments.  In  case  of  falling 
prices  being  the  direct  cause  of  depression  in  a  given  in- 
dustry where  production  costs  have  been  high  and  losses 
entailed,  lower  prices  do  not  of  course  necessarily  mean 
depression.  If  production  has  been  large  the  reduced  cost 
lowers  prices  and  sometimes  stimulates  trade  because  of 
greater  consumption.  Through  a  period  of  depression 
prices  gradually  decline  until  the  bottom  has  been  reached. 
Sometimes  prices  go  down  beyond  reason  because  of  the 
panicky  feeling  among  buyers,  in  which  case  production 
must  stop,  bringing  sharp  reaction.  For  instance,  in  1920, 
when  cotton  went  far  below  cost  of  production,  the  result 
was  a  curtailment  of  acreage  amounting  to  40  to  50  per 
cent,  bringing  the  following  Fall  sharp  upward  reaction  in 
prices  to  the  extent  of  80  per  cent.  After  it  is  apparent 
that  the  bottom  has  been  reached  prices  will  start  an  up- 
ward climb,  bringing  a  feeling  of  hopefulness  and  activity. 
Buyers  will  not  buy  on  a  falling  market  for  more  than  im- 
mediate demand,  but  they  will  buy  liberally  on  a  strong  or 
rising  market,  because  of  the  speculative  chance  to  make 
more  than  a  normal  margin  on  the  purchase. 

Falling  prices  are  also  brought  about  by  the  recurring 
necessity  for  adjustments  of  credits.  When  the  cycle  of 


HISTORY  OF  BUSINESS   DEPRESSIONS  259 

liquidation  comes  manufacturers  and  merchants  hasten  to 
turn  stocks  into  money  in  order  to  meet  loans  coming  due. 
Many  times  these  stocks,  if  held  and  marketed  in  an  orderly 
way,  would  bring  normal  prices,  but  when  loans  are  called 
money  must  be  secured  and  stocks  are  sacrificed  at  re- 
duced prices.  This  has  a  tendency  to  break  the  market. 
Forced  credit  liquidations  are  an  important  factor  in  pro- 
ducing falling  prices  and  consequent  depression.  Banks 
are,  however,  more  and  more  willing  today  to  carry  the 
borrower  until  such  time  as  he  can  market  without  too 
great  a  sacrifice.  It  has  been  calculated  that  the  loss  on 
industrial  stocks  during  the  depression  of  1903  exceeded 
$3,000,000,000.  The  depreciation  of  securities  of  1907  and 
1920  was  much  greater,  and  if  stocks  or  raw  material  and 
merchandise  were  taken  into  consideration  the  total  would 
be  very  greatly  increased.  It  was  too  much  inflation  in 
flush  times  that  brought  conditions  where  falling  prices 
were  inevitable. 

Exports  of  Gold. — Gold  is,  of  course,  being  more  or  less 
constantly  exported  to  settle  balances,  but  a  large  and  con- 
tinuous outflow  of  gold  denotes  an  unhealthy  condition  back 
of  it.  It  is  likely  to  mean  a  money  crisis  ahead  and  probably- 
ensuing  depression.  When  the  export  of  gold  is  attended 
by  a  scarcity  of  money  and  a  marked  increase  in  the  rate 
of  discount,  it  is  a  decidedly  unfavorable  indication.  Un- 
less the  flow  stops  and  the  tide  turns  it  may  be  taken  for 
granted  that  a  crash  will  follow.  The  big  financial  centers 
watch  the  gold  situation  very  carefully,  and  money  condi- 
tions are  very  sensitive  to  the  gold  situation.  Financiers 
who  are  in  a  position  to  watch  gold  movements  often  have 
the  inside  track,  so  to  speak,  and  are  able  to  cover  before 
a  crisis.  It  is  these  "gold  sharks"  who  are  invariably 
found  to  be  the  men  who  profit  from  depressions.  In  other 
words,  they  are  experts  in  buying  cheap  and  selling  dear. 
Gold  has  a  close  bearing  upon  our  business  life  and  the 


260  HISTORY  OF   BUSINESS   DEPRESSIONS 

average  business  man  should  watch  its  trends  closer  than  he 
does. 

Bad  Banking. — This  should  properly  come  under  the 
head  of  speculation.  Unsound  banking  has  caused  a  great 
deal  of  difficulty  for  business,  and  this  is  not  altogether  the 
fault  of  the  banker.  On  the  whole  he  is  generally  con- 
scientious in  desiring  to  aid  in  the  development  of  the 
country.  Newspaper  files  of  our  periods  of  depression  show 
that  almost  invariably  the  public  press  attacked  the  banks 
as  the  cause  of  all  the  difficulties.  In  1920-21  business 
men  claimed  that  they  were  left  to  shift  for  themselves 
while  the  bankers  watched  and  preserved  their  own  in- 
terests. 

In  times  of  prosperity  men  become  optimistic  beyond 
reason  and  enter  into  transactions  far  beyond  their  means. 
The  mania  of  taking  a  chance  becomes  widespread.  Then 
the  banker  finds  out  that  notes  are  not  being  met  and  a 
large  portion  of  his  customers  have  been  borrowing  for 
speculative  purposes.  Often  they  are  found  dividing  profits 
with  the  banker  himself.  The  situation  reveals  itself  the 
country  over  and  contraction  sets  in.  Then  is  the  time  for 
business  men  and  investors  to  sail  close  to  shore,  to  sell, 
if  possible,  keep  stocks  low  and  quit  taking  chances  for 
a  while. 

We  have  read  a  great  deal  about  bad  financing  during 
the  Nineteenth  Century.  The  early  part  of  the  present 
century  has  seen  great  strides  made  in  halting  the  destruct- 
ive pendulum  swing  back  and  forth  from  extravagant 
prosperity  to  panic.  In  former  days  when  any  financial 
center  got  into  difficulty  it  was  left  to  its  own  resources. 
Now,  even  its  enemies  come  to  its  rescue  because  it  is  well 
understood  that  a  run  on  a  bank's  neighbor  is  likely  to 
lead  to  its  own  disaster  if  allowed  to  go  its  full  course. 
Down  through  the  years  of  history,  as  every  cycle  of  depres- 
sion is  examined,  we  find  the  same  old  story  of  bad  bank- 
ing. It  is  found  that  the  banker  has  invariably  dipped 


HISTORY  OF  BUSINESS  DEPRESSIONS  261 

his  finger  in  the  attending  over-speculation.  The  promoter 
is  smooth  enough  to  arrange  a  division  of  the  excessive 
profits  with  the  banker  and  the  banker  often  makes  injudi- 
cious loans  when  this  division  is  hung  out  as  a  temptation. 
Then  when  the  bubble  bursts  the  banker  goes  to  the  other 
extreme  and  his  tendency  is  to  be  parsimonious,  often  from 
a  very  narrow  viewpoint  and  against  his  own  interests. 

Poor  Crops. — While  crop  conditions  have  a  certain  effect 
on  business,  it  is  often  localized  and  does  not  affect  the 
entire  business  system  to  the  extent  generally  believed. 
Let  us  take  the  year  1900.  Statistics  of  the  Department  of 
Agriculture  show  that  we  had  an  area  planted  amounting 
to  83,320,872  acres,  producing  2,105,102,516  bushels  at  a 
farm  value  of  $751,220,034 — an  average  of  .357c  per 
bushel  or  $9.04  per  acre.  The  following  year,  1901,  a 
greater  area  was  planted,  91,341,928  acres,  but  production 
was  less  than  the  year  before,  being  1,522,519  bushels,  but 
with  a  greater  farm  value,  $921,555,768,  a  per  bushel  value 
of  .605c  and  a  yield  per  acre  of  $10.09.  That  is  a  usual 
instance  because  the  law  of  supply  and  demand  insists  that 
in  a  year  of  short  crops  the  price  is  higher,  bringing  as 
much  money  to  the  farmer  as  a  big  crop  with  lower  prices. 

Foreign  Exchange. — Foreign  exchange  is  a  barometer  of 
world  trade  conditions.  It  is  a  study  in  itself,  and  all  that 
could  be  written  about  it  would  fill  an  ordinary  library. 
Every  business  man  and  investor  should  study  the  question, 
because  as  we  progress  in  our  commerce  and  it  becomes 
more  interlocked  with  that  of  other  countries  conditions 
in  those  countries  will  more  and  more  affect  our  every  day 
business  life  here.  This  subject  is  one  of  growing  import- 
ance. 

We  do  not  carry  on  our  foreign  trade  the  same  as  we  do 
the  business  among  ourselves.  Within  our  own  borders  a 
simple  check  and  draft  system  suffices,  because  funds  in 
Elaine,  Washington,  are  on  a  par  with  funds  in  Key  West, 
Florida.  But  when  a  merchant  in  one  country  trades  with 


262  HISTORY  OF  BUSINESS   DEPRESSIONS 

a  merchant  in  another  country,  there  must  be  a  medium 
through  which  payment  is  cleared.  This  is  known  as  for- 
eign exchange.  In  principle  foreign  and  domestic  exchange 
are  the  same,  the  difference  is  in  the  value  of  the  money 
of  one  country  as  against  another.  Where  the  value  of 
the  standard  money  in  one  country  is  high  it  brings  a 
premium,  whereas  the  money  of  another  country  may  have 
depreciated  for  various  reasons  and  it  is  penalized.  Where 
exchange  is  steady  money  in  the  leading  countries  is  around 
par,  as  during  the  normal  times  preceding  the  World  War. 
Then  trade  flows  fairly  evenly  and  there  is  little  to  fear 
from  difficulties  in  that  direction,  outside  of  the  ordinary 
business  hazards.  But  in  times  of  distress  in  different 
countries,  brought  about  by  political  or  economic  reasons, 
foreign  exchange  has  an  important  bearing  on  the  study  of 
business  depressions.  Foreign  trade  is  done  on  a  basis  of 
payment  in  London  or  New  York  exchange,  or  between 
bankers  themselves  in  gold  specie.  If  by  watching  the 
daily  newspaper  quotations  it  can  be  seen  where  money 
of  a  certain  country  that  buys  a  large  portion  of  our  prod- 
ucts is  depreciated,  there  is  almost  certain  to  be  a  falling 
off  in  demand  from  that  country  and,  unless  some  other 
country  is  taking  the  difference,  depression  in  those  com- 
modities will  likely  result.  Sometimes  this  condition  may 
be  general.  For  instance,  in  1920-21  the  American  dollar 
became  so  high  that  foreign  countries  could  not  afford  to 
buy  dollars  in  order  to  pay  us  in  our  own  money,  which  we 
demanded.  This  augmented  the  depression  because  we 
were  unable  to  ship  our  surplus  out  of  the  country  to  as  large 
an  extent  as  formerly.  In  normal  years  when  trade  flows 
back  and  forth  in  its  regular  channels  and  exchange  is 
around  par,  trade  balances  tend  to  adjust  themselves  in 
the  same  manner  that  a  local  clearing  house  clears  checks 
through  a  system  of  debits  and  credits,  one  against  another. 
We  are  going  to  be  more  affected  by  foreign  exchange  in 
the  future  than  ever  before,  because  New  York  is  now  the 


HISTORY   OF  BUSINESS  DEPRESSIONS  263 

world's  financial  center.  To  the  extent  that  we  are  called 
upon  to  finance  the  world  we  are  going  to  feel  the  reflection 
in  our  own  business  life,  and  foreign  affairs  are  going  to 
more  largely  enter  into  our  trade  revivals  and  depressions. 

Exchange  between  two  countries  is  at  par  when  a  de- 
mand draft  on  either  country  sells  in  the  other  at  its  face 
value.  For  instance,  an  English  pound  sterling  in  mint 
value  is  $4.8665.  Exchange  therefore  at  par  would  bring 
$486.65  on  a  draft  of  100  pounds,  less  the  small  banking 
charge.  If,  however,  conditions  bring  about  a  change  in 
the  par  value  of  either  standard  of  money,  the  exchange 
rates  would  immediately  reflect  that  fact.  If  a  business 
man  is  shipping  goods  to  England,  or  is  dependent  on  cus- 
tomers who  ship  there,  and  a  dollar  is  quoted  at  a  premium 
over  the  pound,  then  he  can  expect  a  slowing  up  of  orders 
from  England  until  the  exchange  is  more  favorable.  Thus 
it  will  be  seen  that  foreign  exchange  not  only  affects  the 
exporter  and  importer,  but  all  of  us  who  are  dependent  more 
or  less  on  them.  When  foreign  exchange  is  continually 
against  us,  as  in  1920-21,  we  may  expect  general  depression 
to  some  extent. 

A  premium  on  the  dollar,  as  was  the  case  in  1920-21, 
means  that  there  is  an  abundance  of  gold  in  this  country 
to  back  up  the  dollar,  whereas  a  depreciating  pound  sterling 
or  German  mark  would  mean  that  gold  reserves  were  either 
depleted  in  proportion  to  the  depreciation  or  there  was  an 
over  abundance  of  fiat  money  in  circulation  in  those  coun- 
tries. Another  element  that  enters  into  the  trade  situa- 
tion is  the  fact  that  when  the  exchange  rate  is  against  us, 
that  is,  when  the  dollar  is  at  a  premium,  we  are  likely  to 
not  only  export  less  but  to  import  more,  because  countries 
with  depreciated  money  will  make  extraordinary  efforts  to 
export  in  large  quantities  in  order  to  establish  a  trade 
balance  and  get  the  gold  flowing  back  to  them.  Ordi- 
narily, if  we  loaned  a  great  deal  of  money  to  France,  for 
instance,  or  purchased  their  securities,  there  would  be  a 


264  HISTORY  OF  BUSINESS  DEPRESSIONS 

great  outflow  of  gold  from  this  country  to  France.  But 
during  the  recent  war  period  when  we  loaned  heavily  to 
Europe  we  loaned  through  a  process  of  giving  bank  credits 
in  this  country  with  the  understanding  that  credits  were 
not  to  be  transferred  to  Europe  but  were  to  be  used  for 
purchases  of  supplies  in  this  country.  Thus  the  exchange 
later  worked  against  us,  whereas  had  we  sent  the  gold  it 
would  have  been  in  our  favor.  In  this  way  also  we  became  a 
creditor  nation  and  at  the  same  time  kept  the  gold  here. 

The  question  of  discount  rates  also  enters  largely  into 
the  matter  of  foreign  trade,  but  does  not  necessarily  bear 
directly  on  trade  depressions  in  this  country.  When  there 
is  a  panic  in  one  country  it  will  immediately  be  reflected 
by  the  exchange  rates.  With  distrust  growing  in  one  coun- 
try and  reserves  depleted  banks  will  raise  their  discount 
rates,  which  will  be  followed  by  like  action  by  banks  in 
commercially  related  countries. 

In  such  times  the  banks  of  a  country  in  distress  draw 
to  the  limit  on  their  reserves  in  other  countries,  and  those 
countries  are  often  taxed  to  meet  them.  It  is  through  this 
medium  that  one  country  is  directly  affected  by  panic  in 
another.  It  does  not  follow  that  all  countries  are  to  be 
affected  by  a  panic  in  some  one  country,  but  only  those 
groups  of  commercially  related  countries  which  depend 
largely  upon  one  another.  Even  then,  with  a  good  banking 
system,  one  country  need  not  necessarily  be  greatly  af- 
fected by  a  crisis  in  another,  no  matter  how  closely  related. 

In  1920-21  people  in  necessitous  countries  hoarded  large 
amounts  of  foreign  money,  due  to  the  huge  profits  they 
saw  accumulating  daily  through  the  continuous  deprecia- 
tion of  their  own  currency.  Depression  can  only  be  rem- 
edied by  finding  a  means  of  stabilizing  exchange.  This 
may  be  done  by  making  loans  to  countries  whose  exchange 
is  depreciated  and  help  them  to  restore  confidence,  or  to 
buy  sufficient  of  their  goods  to  give  them  a  favorable  trade 
balance,  causing  the  flow  of  gold  into  that  country.  Most 


HISTORY  OF  BUSINESS   DEPRESSIONS  265 

nations  are  not  willing  to  import  goods,  because  it  destroys 
home  industry.  But  they  are  more  willing  to  make  loans  if 
certain  of  payment  at  maturity.  These  loans  simply  help 
in  the  transition  stage,  and  in  time  the  situation  will  work 
itself  out.  Unfavorable  exchange  prolonged  for  more  than 
a  short  time  will  cause  the  creditor  country  to  feel  the  effect 
as  much  as  the  debtor  country.  When  exchange  is  stabilized 
the  vicious  cycle  is  broken  and  economic  conditions,  all  other 
factors  being  satisfactory,  will  quickly  return  to  normal. 

In  times  of  war  some  countries  still  resort  to  the  mediaeval 
practice  of  prohibiting  the  export  of  gold.  This  causes  a 
still  wider  fluctuation  in  exchange.  Exchanges  are  af- 
fected by  the  constant  flow  of  gold  and  goods.  This  has 
its  effect  on  trade  in  this  country  because  exchange  being 
against  other  countries  they  naturally  can  afford  to  buy 
only  as  little  as  possible,  whereas  the  premium  on  our 
money  makes  it  favorable  for  us  to  buy  what  we  like.  All 
this  causes  the  agitation  for  American  valuation  in  the 
tariff.  The  tariff  schedules  enacted  in  normal  times  be- 
come a  mass  of  confusion  and  have  effects  far  from  their 
original  intention  in  times  of  abnormal  exchange. 

Exchange  can  be  brought  to  par  by  the  simple  expedient 
of  shipping  gold.  But  in  times  of  stress  some  countries 
do  not  have  the  gold  to  ship  or,  as  a  matter  of  self -protec- 
tion, do  not  wish  to  ship  what  they  have.  In  such  a  case 
foreign  exchange  must  be  carried  on  through  the  draft 
system,  which  is  generally  used  between  countries  that  have 
a  very  even  balance  of  trade.  All  countries  do  business 
through  New  York  and  London  drafts,  and  these  drafts 
can  be  cashed  above  or  below  par  according  to  the  gold 
situation  and  the  trade  balances  in  the  different  countries. 
The  high  price  of  drafts  in  Germany  would  encourage  and 
stimulate  the  sale  of  American  goods  in  Germany  and 
would  encourage  buying  in  Germany.  Likewise,  high 
prices  of  drafts  in  the  United  States  would  encourage  and 
stimulate  the  sale  of  German  goods  in  this  country  and 


266  HISTORY   OF   BUSINESS   DEPRESSIONS 

discourage  them  from  buying  from  us.  It  is  evident  then 
that  a  favorable  trade  balance,  such  as  we  experienced 
during  the  war,  could  not  keep  up  indefinitely.  The  tide 
must  flow  out,  and  this  is  often  accomplished  by  a  period 
of  depression. 

Mr.  Frank  Vanderlip  has  proposed  a  billion  dollar  inter- 
national bank  for  the  twofold  purpose  of  regulating  foreign 
exchange  and  promoting  international  trade.  This  idea  is 
undoubtedly  good,  and  if  put  into  execution  would  go  a  long 
way  toward  solving  the  knotty  problem  of  foreign  ex- 
change. 

Strain  of  Credit. — Through  the  agency  of  credit  a  great 
number  of  obligations  payable  in  money  are  created.  It 
would,  of  course,  be  impossible  to  redeem  them  all  at  one 
time.  Against  these  credits  there  is  kept  a  certain  amount 
of  gold  as  reserve.  If  demands  for  redemption  lessen  the 
quantity,  it  must  be  replenished.  These  demands  now  arise 
mostly  from  foreign  sources.  It  can  be  replenished  only  by 
curtailing  credits.  Such  a  process  does  not  lessen  in  any 
degree  the  amount  of  existing  wealth,  but  none  the  less  it 
may  necessitate  painful  readjustments  in  business.  Those 
who  had  counted  upon  the  continuance  of  credit  accommo- 
dations are  forced  to  curtail  or  even  abandon  their  oper- 
ations. 

"If  the  demand  for  a  liquidation  of  outstanding  credits  is 
widespread,  panic  and  business  depression  ensue.  Wealth 
is  not  destroyed.  But  the  control  of  wealth  passes  more  and 
more  into  the  hands  of  those  who  own  the  wealth,  and  its 
activity  is  lessened.  Capital  or  wealth  used  in  production  is 
diminished,  and  with  the  decrease  in  capital  the  creation  of 
new  wealth  slackens.  On  the  other  hand,  in  times  of  re- 
viving business,  the  prospect  of  gain  lures  wealth  into  pro- 
ductive uses  and  through  credit  the  available  capital  is  in- 
creased." Thus  back  of  all  the  alternate  periods  of  pros- 
perity and  depression  lies  the  question  of  credit.  No  plan 
has  yet  been  found  effective  which  will  prevent  these  fluctu- 


HISTORY  OF  BUSINESS  DEPRESSIONS  267 

ations,  nothing  which  will  give  credit  freely  when  credit  is 
most  wanted.  But  through  a  wise  adjustment  of  credit 
agencies  much  can  be  done  to  mitigate  the  severity  of  pe- 
riods of  stress  and  strain. 

A  time  must  come  when  there  must  be  a  contraction  of 
over-expanded  credit.  At  times  we  find  the  capital  of  the 
nation  largely  tied  up  in  the  hands  of  speculators  who  have 
practiced  the  unbelievable  process  of  borrowing  the  peo- 
ple's money  in  order  to  increase  the  prices  of  their  own 
necessities.  As  the  periods  come  along  when  we  work  out 
of  depressions  into  good  times  the  speculator  gradually 
starts  to  borrow  money  because  he  is  smart  enough  to  know 
that  things  are  on  the  upward  grade.  He  picks  commodities 
on  which  prices  are  well  declined  and  are  bound  to  rise  with 
greater  demand.  As  time  goes  on  he  makes  fair  margins, 
thus  encouraged  he  increases  his  holdings  through  greater 
borrowing.  This  continues  for  several  years,  all  the  time 
the  rising  tide  of  prosperity  increases  the  fury  of  specula- 
tion when  finally  the  peak  is  reached.  Some  unforeseen  in- 
cident brings  sharp  reaction  or  a  revolt  on  the  part  of  the 
public  against  the  ever  increasing  prices.  Bank  reserves 
become  low  from  the  large  borrowing  and  then  the  banker 
becomes  wary  and  begins  to  call  loans.  When  this  time 
comes  great  sums  of  money  are  found  in  the  hands  of  specu- 
lators. Some  of  them  hurry  to  unload  if  possible,  taking  a 
small  loss  out  of  their  already  large  gains  and  laying  low 
until  the  depression  blows  over.  Others  have  to  be  carried 
by  the  banks  until  the  security  can  regain  its  value  and 
passed  on  to  others.  Thus  speculation  is  not  only  responsi- 
ble in  bringing  on  our  crises  and  depressions,  but  it  inva- 
riably prolongs  them  because  of  the  long,  painful  spell  that  is 
required  to  get  conditions  back  to  normal.  During  all  this 
time  we  hear  the  constant  cry :  "Liquidate !  Liquidate !"  and 
the  average  legitimate  borrower  and  business  man  and  far- 
mer are  forced  to  liquidate  many  times  at  a  sacrifice  while 
the  capital  of  the  country  and  their  own  deposits  are  used  to 
hold  up  speculators,  non-producers,  who  have  over-borrowed 


268  HISTORY  OF   BUSINESS   DEPRESSIONS 

and  if  allowed  to  fail  would  often  endanger  the  solvency  of 
the  banking  institutions  themselves. 

An  English  View. — Mr.  J.  M.  Keynes  who  was  in  charge 
of  all  loans  made  by  Great  Britain  during  the  war  and 
author  of  "The  Economic  Consequences  of  Peace,"  gives  a 
view  on  the  world  wide  depression  from  the  British  stand- 
point. "The  causes  of  these  'cyclical  fluctuations'  are  va- 
rious and  disputed.  Like  its  predecessors,  the  recent  de- 
pression has  been  of  complex  origin.  But  a  bad  season  in 
Asia  and  the  miscalculations  of  merchants  have  played  the 
biggest  part.  No  doubt  the  war  has  been  indirectly  respon- 
sible, because  the  severity  of  the  crisis  has  been  due  to  the 
exceptional  range  of  miscalculation,  which  the  terriffc  fluc- 
tuations in  prices  consequent  on  the  budgetary  policies  of 
governments  have  brought  about,  and  also  by  the  inapplica- 
bility of  pre-war  standards  as  a  guide  to  what  was  normal. 
These  helped  business  to  lose  its  bearings  and  to  drift  far 
out  of  its  course.  If  we  look  back  eighteen  months,  it  is 
obvious  how  greatly  the  troubles  of  traders  have  been  due, 
not  so  much  to  the  intrinsic  situation  as  to  grave  miscalcu- 
lations about  it.  The  crisis  commenced,  not  in  Europe,  but 
in  Japan.  Thence  it  spread  to  the  United  States;  next  to 
England  and  last  of  all  to  continental  Europe,  which  has 
not,  at  any  time,  experienced  its  full  severity.  What  upset 
British  business  was  the  sudden  drying  up  of  the  Overseas 
markets,  India,  China,  Australia,  South  Africa  and  South 
America;  and  it  was  the  collapse  of  the  exchanges  between 
London  and  many  of  these  centers,  rather  than  of  those  be- 
tween London  and  the  continent  of  Europe,  that  threw  out 
the  calculations  of  the  business  world. 

There  were  two  other  factors  also  which  multiplied  the 
stream  of  commitments.  Many  markets  had  been  starved 
by  the  war  of  their  usual  supplies,  and  were  replenishing 
stocks.  But  it  was  difficult  to  know  how  much  current  de- 
mand represented  such  replenishment  and  how  much  of  it 
was  covered  by  current  consumption.  Lastly,  the  abnormal 
demand  stimulated  by  all  these  influences  was  yet  further 


HISTORY  OF   BUSINESS  DEPRESSIONS  269 

exaggerated,  because  merchants,  experiencing  an  unusual 
difficulty  in  obtaining  deliveries  began  placing  orders  on 
an  even  larger  scale  than  they  really  wanted,  in  order  to 
make  sure  of  obtaining  at  least  a  proportion.  For  all  these 
reasons  merchants  and  middlemen  in  all  quarters  of  the 
world  over-ordered  enormously.  That  is  to  say,  they  en- 
tered in  advance  into  commitments  on  a  scale  greatly  in 
excess  of  the  current  rate  of  consumption  and  at  a  price 
level  above  that  which  the  currency  systems  of  the  world 
could  support,  hugely  inflated  though  they  were,  when  once 
the  actual  goods  were  coming  into  existence  and  needing 
finance.  This  necessarily  resulted  in  an  excess  of  stocks 
and,  when  the  value  of  the  stocks  exceeded  the  amount  of 
wealth  which  the  world  was  voluntarily  prepared  to  set 
aside  in  this  form,  the  bubble  burst." 

Political  Uncertainty. — H.  Gordon  Selfridge,  in  his  ad- 
mirable book  "The  Romance  of  Commerce,"  says:  "There 
are  enough  mistakes  made  and  poor  judgment  shown,  as 
we  all  know,  in  that  field  of  activity  called  Commerce;  but 
if  one-tenth  of  the  foolishness  had  been  employed  there  that 
has  been  exhibited  by  those  who  have  undertaken  to  govern, 
all  commerce  and  everyone  connected  with  it,  would  have 
been  bankrupted  many  times  over  and  have  sunk  long  since 
in  the  seas  of  oblivion." 

Political  uncertainties  often  retard  industry.  The  states- 
man (a  dignified  name  for  politician)  is  often  unmindful  of 
the  injury  he  is  doing  in  bickering  and  delay.  How  many 
times  has  trade  been  halted  waiting  the  leisurely  action  of 
the  legislators!  The  old  bugaboo  that  we  cannot  change 
political  administrations  without  accompanying  depression 
was  long  ago  exploded.  Time  has  proven  that  depressions 
come  under  the  administration  of  one  political  party  as  well 
as  another  and  it  would  be  a  sad  and  evil  day  for  the  Ameri- 
can Republic  if  the  threat  were  constantly  held  over  us  that 
we  had  to  vote  one  way  or  have  our  bread  and  butter  taken 
away  from  us. 


270  HISTORY   OF   BUSINESS   DEPRESSIONS 

Presidential  Elections. — It  is  rather  old-fashioned  now  to 
ascribe  business  depressions  to  presidential  election  years. 
That  has  been  so  overdone  in  the  use  of  politics  and  proven 
to  be  so  utterly  without  foundation  that  it  is  worth  but  little 
space.  By  way  of  information,  however,  the  accompanying 
table  will  show  the  presidential  election  years  since  1800  and 
the  years  of  depression,  showing  that  only  five  depressions 
have  occurred  in  our  history  during  presidential  election 
years,  two  of  them  being  minor  depressions. 

Presidential  Election  Years 

1800  1816  1832  1848  1864  1880  1896  1912 

1804  1820  1836  1852  1868  1884  1900  1916 

1808  1824  1840  1856  1872  1888  1904  1920 

1812  1828  1844  1860  1876  1892  1908 

Depressions  falling  in  these  years  are : 

1808  1848  1860  1884  1920 

In  one  of  these,  namely,  1884,  the  depression  was  an  issue 
in  the  campaign.  In  none  of  the  others  was  there  much 
connection  between  politics  and  business,  although  the  de- 
pression of  1860  was  obviously  from  political  causes  on  ac- 
count of  the  threatening  Civil  War. 

Excessive  Taxation. — High  taxes  are  going  to  be  more  and 
more  a  cause  of  depression  in  this  country  in  future  gener- 
ations. In  our  early  history  the  government  was  rich  be- 
yond compare  because  of  the  enormous  amount  of  public 
lands.  From  the  sale  of  these  the  Federal  treasury  not 
only  received  sufficient  to  run  the  government,  but  divided 
great  sums  between  the  States.  Following  this  period  un- 
der the  protective  regime  we  collected  sufficient  from  that 
source  together  with  such  internal  revenue  taxes  as  were 
obtained  from  tobacco  and  liquor  to  run  the  government. 
Then  as  we  went  into  the  Twentieth  Century  our  expenses 
were  so  enormous  that  we  began  to  devise  means  of  direct 
taxation  and  the  income  and  corporation  taxes  resulted. 


HISTORY  OF  BUSINESS   DEPRESSIONS  271 

Under  our  present  laws,  on  incomes  of  $200,000.00  and  over 
we  exact  fifty  per  cent.  All  of  this,  no  doubt,  has  its  effect 
because  the  incentive  is  taken  away  to  some  extent  for  large 
capitalists  to  make  an  effort  because  half  of  the  effort,  they 
feel,  goes  for  naught.  Let  us  turn  to  the  history  of  the 
Roman  Empire  and  examine  into  the  causes  of  its  decline. 
We  will  find  that  "the  pressure  of  public  burdens  was  an  in- 
creasing disability  that  ate  the  very  heart  out  of  the  capi- 
talist and  the  labourer  alike;  there  was  no  hope  to  inspire 
energy  or  encourage  enterprise  and  the  gradual  decay  cul- 
minated in  an  utter  collapse."  The  exorbitant  taxes  col- 
lected to  maintain  an  expensive  government  started  the 
decline  of  the  commercial  life  of  Rome.  Will  history  re- 
peat in  Europe  and  America?  Money  spent  for  taxation 
does  not  reproduce  and  unless  we  can  keep  money  in  pro- 
ductive channels  we  are  bound  to  have  depression  in  trade. 

Dumping. — This  subject  is  one  of  the  utmost  importance 
during  depressions.  After  the  Revolution  when  we  had  no 
organized  central  government,  our  trade  was  severely  de- 
pressed by  dumping  of  English  goods  on  our  market.  Our 
infant  manufactures  had  to  close  down  and  the  trade  bal- 
ance was  enormously  against  us. 

Our  great  depression  of  1819  was  brought  on  as  a  direct 
cause  of  dumping  European  goods  in  this  country.  It  was 
then  that  Lord  Brougham  made  his  famous  speech  in  Par- 
liament :  "It  was  well  worth  while  to  incur  a  loss  upon  the 
first  exportation,  in  order,  by  the  glut,  to  stifle  in  the  cradle 
those  rising  manufactures  in  the  United  States  which  the 
war  had  forced  into  existence,  contrary  to  the  natural  course 
of  things." 

While  a  protective  tariff  law  had  been  enacted  in  1812 
which  gave  some  protection  during  the  war,  it  was  entirely 
inadequate  and  when  peace  came  in  Europe  in  1815  followed 
by  very  terrific  depression  and  low  prices  in  1816,  this 
country  became  flooded  with  their  surplus  which  was  dis- 
posed of  by  the  well-known  "auction"  system.  European  ex- 
porters were  willing  to  sell  at  almost  any  price ;  first,  to  get 


272  HISTORY   OF  BUSINESS  DEPRESSIONS 

cash ;  second,  to  destroy  the  rising  American  manufactures. 
Considerable  agitation  swept  over  this  country  against  the 
"auctions ;"  yet  they  multiplied  and  in  one  year  $14,685,399 
worth  of  merchandise  was  auctioned  in  this  country,  which 
was  double  the  normal  needs  of  the  people.  No  wonder 
prices  in  this  country  fell  swiftly.  Imported  goods  were 
drawn  into  every  nook  in  the  country,  causing  stagnation 
to  the  American  manufacturer.  Merchants  and  farmers 
bought  these  goods  eagerly,  because  they  were  cheap,  but  in 
doing  so  they  undermined  the  prosperity  of  their  own 
country. 

The  dumping  of  this  period  of  "auctions,"  as  it  was  called, 
was  a  nightmare  to  American  merchants  and  manufactur- 
ers for  many  decades.  Prices  fell  so  low  that  merchandise 
brought  little  more  than  the  duties.  Auctioneers  increased 
in  number,  wealth  and  influence.  It  was  a  common  custom, 
and  one  well  understood  by  merchants,  that  many  foreign 
importers  residing  here,  and  who  sold  their  goods  mostly 
by  auction,  were  in  the  constant  habit  of  receiving  two  in- 
voices for  each  parcel  of  goods.  One  of  these  was  made  out 
at  a  very  low  rate  and  was  used  to  enter  the  goods;  "the 
other  contained  the  actual  cost."  Of  course,  the  government 
was  injured  by  losing  the  revenue  justly  due  it,  while  Amer- 
ican manufacturers  and  importers  suffered  materially.  Of 
the  many  industrial  enterprises  which  had  been  launched 
during  the  war  with  so  much  confidence,  only  a  few  had 
had  a  prosperous  history.  Many  had  been  hopelessly 
wrecked ;  while  others  were  thumping  against  the  rocks  and 
threatened  with  speedy  ruin. 

After  the  Civil  War  we  were  saved  because  of  protective 
duties  against  dumping  and  naturally  this  subject  is  re- 
lated to  the  tariff.  Traders  of  all  countries  do  this.  We 
are  as  guilty  as  the  others.  For  years  our  manufacturers 
have  sold  the  surplus  abroad  at  less  than  in  the  domestic 
market.  But  practically  all  countries  are  now  providing 
against  it.  Following  the  World  War  our  rich  market  and 
high  prices  were  prey  for  the  foreign  trader  with  a  sur- 


HISTORY  OF  BUSINESS  DEPRESSIONS  273 

plus.  Everything  was  dumped  on  our  market  that  could  be 
found  in  foreign  countries,  particularly  food  stuffs,  affecting 
the  farmer  very  adversely.  This  was  one  of  the  primary 
causes  of  the  1920-21  depression.  Had  we  a  protective  tariff 
or  even  an  anti-dumping  law  our  commodities  would  have 
been  given  a  chance  to  seek  their  normal  level  gradually. 
When  our  farmers  and  manufacturers  cannot  have  their 
home  market  it  is  bound  to  mean  depression,  unemployment 
and  far-reaching  distress.  In  1920  we  were  as  thoroughly 
at  the  mercy  of  foreign  cheap  labor  as  we  were  in  1819. 

The  American  valuation  plan  is  now  agitated  as  an  anti- 
dote to  dumping,  but  this  plan  is  not  new.  It  was  first 
known  as  the  "Home  Valuation"  principle  and  was  advanced 
by  John  Quincy  Adams  when  he  was  a  member  of  Congress 
in  1832. 

Hoarding  Money. — In  former  years  the  practice  of  hoard- 
ing money  no  doubt  augmented  depressions  to  a  large  extent. 

It  is  said  that  French  peasants  in  the  19th  century  uni- 
versally hoarded  their  savings,  many  times  causing  severe 
stringency.  Hoarding  was  also  practiced  in  America  during 
the  19th  century,  particularly  in  the  rural  communities.  As 
late  as  the  panic  of  1907  a  representative  of  the  house  of 
J.  P.  Morgan  &  Co.  gave  as  one  of  the  causes  of  the  money 
stringency  and  panic  that  of  money  being  hoarded  away 
in  private  places  and  kept  out  of  circulation.  As  the  intelli- 
gence of  our  people  has  advanced,  this  practice  no  doubt  de- 
creased, although  it  is  yet  to  be  reckoned  with.  In  the  1920- 
21  depression  the  average  citizen  liked  to  carry  a  "bank- 
roll" of  much  larger  proportion  than  formerly.  In  the  flush 
times  of  the  war  people  became  used  to  it  and  this  practice 
has  taken  the  place  of  the  pot  of  coin  hidden  under  the  floor 
or  the  stocking  stuffed  full  of  money  and  hid  in  the  bureau. 
The  worst  feature  of  hoarding  is  that  it  is  more  likely  to 
be  practiced  in  times  of  stress  or  depression  when  it  is  most 
harmful.  The  use  of  money  as  a  store  of  value  diminishes 
its  efficiency  for  the  purpose  for  which  it  is  intended.  It 
therefore  increases  the  demand  for  money  since  an  ineffi- 


274  HISTORY  OF  BUSINESS   DEPRESSIONS 

cient  instrument  does  less  work.  Conversely,  whatever  in- 
creases the  efficiency  of  money  lessens  the  demand  for  it. 
Whatever  increases  the  rapidity  with  which  money  circu- 
lates therefore  diminishes  the  demand.  It  is  one  of  the  ad- 
vantages of  the  introduction  of  banking  habits  that  men 
carry  less  money  in  their  pockets  and  thus  money  acquires  a 
greater  rapidity  of  circulation. 

At  the  time  of  the  Mississippi  Bubble,  1720,  under  a  paper 
currency  regime  specie  money  was  hoarded  to  such  an  ex- 
tent that  France  was  practically  bare.  Yeats'  description 
of  this  period  was:  "Under  the  belief  that  coin  was  being 
hoarded,  people  were  forbidden  to  keep  at  home  a  sum  in 
coin  exceeding  500  livres,  or  to  use  any  medium  of  payment 
for  amounts  over  100  livres  except  bank  notes.  Still  money 
disappeared.  The  resources  of  charitable  institutions,  or- 
phan schools,  hospitals  and  almshouses  were  demanded  by 
the  state  and  exchanged  for  paper.  Finally,  the  penalty  of 
confiscation  was  proclaimed  against  all  who  should,  from 
the  date  of  the  proclamation,  keep  gold  or  silver  in  their 
houses,  whether  coined  or  uncoined,  instead  of  exchanging 
it  for  paper  money.  With  nothing  left  to  confiscate,  even 
arbitrary  power  was  at  a  loss.  The  precious  metals  ap- 
peared to  have  left  the  country.  Foreign  merchants  could 
not  be  compelled  to  take  paper  instead  of  gold,  nor  could 
they  be  prevented  from  paying  in  French  notes  for  the 
goods  they  bought.  Discontent  and  fear  led  to  hoarding, 
in  spite  of  proclamations.  The  medium  of  exchange  was 
at  length  reduced  entirely  to  paper.  Trade,  both  foreign  and 
domestic,  became  paralysed." 

Preceding  and  during  the  panic  of  1893  large  sums  of 
money  were  withdrawn  from  the  banks  and  hidden  away. 
This  was  because  the  treasury  had  an  over  abundance  of  sil- 
ver certificates  and  treasury  notes  and  fear  spread  that  the 
treasury  would  never  be  able  to  redeem  them  in  gold  if  it 
were  called  upon.  In  this  case  confidence  not  only  in  the 
banks  but  in  the  Treasury  itself  was  shaken. 

War. — The  United  States  has  been  particularly  fortunate 


HISTORY   OF   BUSINESS   DEPRESSIONS  275 

as  regards  serious  foreign  wars  which  often  threaten  the 
foundations  of  a  nation's  economical  system.  Only  once 
have  we  been  invaded — in  the  war  of  1812 — and  that  was  by 
a  surprise  and  entirely  a  fluke.  In  no  other  instance  have 
we  even  been  threatened  by  invasion  by  a  foreign  country. 
Our  wars,  on  the  other  hand  have  been  beneficial  to  our 
economic  interests  in  the  long  run.  In  our  Mexican  War 
we  gained  great  territory,  including  vast  gold  fields.  In  the 
Civil  War  we  preserved  the  Union  perpetually,  preventing 
two  nations  instead  of  one.  After  the  Spanish-American 
war,  trade  again  followed  the  flag. 

It  stands  to  reason  that  business  distress  accompanies 
the  outbreak  of  a  first  rate  war  and  brings  depression  in 
countries  who  have  trade  relations  with  those  at  war.  It 
may  even  cause  suspension  of  gold  payments.  The  after- 
math of  war  has  peculiar  effect  on  economic  conditions. 
After  1870  France,  the  defeated,  with  big  indemnities  was 
more  prosperous  than  Germany,  the  victor.  This  situation 
was  reversed  following  the  World  War  when  Germany,  the 
defeated,  was  more  prosperous  than  France,  the  victor. 

While  wars  have  caused  many  depressions,  yet  on  the 
other  hand  quite  a  number  of  wars  have  been  caused  by 
commercial  selfishness.  In  the  Middle  Ages  when  commerce 
began  to  take  hold  of  the  people  as  an  economic  science 
one  country  would  suffer  a  period  of  depression  while,  per- 
haps, its  neighbor  prospered  either  because  of  discrimi- 
nating tariffs  or  favorable  natural  conditions.  This  led  to 
quarrels  and  war. 

War,  while  it  always  stimulates  business,  really  makes 
the  rich  richer  and  the  poor  poorer.  Nations  are  coming 
to  find  that  war  no  longer  pays  and  it  is  admitted  now  that 
had  Germany  continued  her  peace-time  course  she  would 
have  conquered  the  commercial  world,  whereas  she  failed 
to  conquer  the  political  world.  Eventually  the  fiddler  must 
be  paid  by  both  victor  and  vanquished  and  many  times  their 
economic  difficulties  as  an  aftermath  spread  to  involve  the 
neutrals.  While  France  staged  her  revolution  amid  streams 


276  HISTORY  OF   BUSINESS   DEPRESSIONS 

of  blood  and  flame,  England  silently  and  peacefully  under- 
went her  industrial  revolution,  increasing  her  wealth  ten- 
fold and  putting  her  a  half  century  ahead  of  her  commer- 
cial competitor. 

To  prosecute  a  war  naturally  calls  out  the  resources  of  a 
nation.  Currency  is  inflated.  Great  quantities  of  money 
are  put  into  use.  This  money  is  still  out  at  the  end  of  the 
war  and  overlaps  for  the  period  of  two  or  three  years,  keep- 
ing conditions  good  during  that  time,  as  was  the  case  fol- 
lowing the  Revolutionary  War,  the  Civil  War,  the  War  of 
1812,  the  Spanish-American  War  and  the  World  War.  Off- 
setting this  is  the  overproduction  in  some  lines.  This  ma- 
terial including  food-stuffs  having  been  put  in  warehouses 
in  anticipation  of  war  uses  is  held  back  for  a  while  before 
being  thrown  on  the  market.  Returning  soldiers  are  paid 
off,  thus  putting  money  into  circulation,  helping  the  times 
immediately  following  war,  but  when  this  money  is  spent 
and  the  men  have  to  get  back  into  production  and  the  sur- 
plus material  begins  to  be  sold,  then  follows  trouble.  The 
worst  effects  of  after-war  depressions  could  be  avoided  if 
the  same  skill,  energy  and  resourcefulness  was  used  in  that 
direction  as  was  used  to  prosecute  the  war.  The  depression 
of  1920  could  have  been  prevented  in  a  large  measure  had 
administrative  ingenuity  been  properly  used  for  a  longer 
period  after  the  war.  When  the  armistice  was  declared  and 
war  industries  stopped,  throwing  great  numbers  of  men  out 
of  employment,  the  government  of  necessity  got  back  of  the 
situation  and  the  weight  of  our  financial  structure  was 
thrown  back  of  peace  industries  that  were  languishing.  The 
men  were  put  back  to  work  in  these  industries  and  the  re- 
turning soldiers  absorbed  as  fast  as  they  returned.  In  fact, 
there  was  such  a  demand  for  labor  that  the  Government  was 
urged  to  speed  up  the  return  of  the  men.  Great  prosperity 
ensued  until  April,  1920,  when  the  depression  set  in  and 
gradually  spread  over  the  country,  growing  worse  as  the 
months  went  by.  The  presidential  campaign  was  coming 
on,  the  President  had  been  afflicted  with  paralysis,  the  Sec- 


277 

retary  of  the  Treasury,  Mr.  McAdoo,  had  resigned  and  there 
was  no  head  to  the  Government.  When  various  local  crises 
sprang  up  as  a  result  of  after-war  readjustment,  there  was 
no  head  to  the  government  to  help  straighten  things  out. 
Cabinet  members  refused  to  take  any  step,  fearing  the  con- 
sequences that  happened  to  Mr.  Lansing.  Had  there  been  an 
active  executive  at  the  head  of  the  Government  who  was  am- 
bitious and  willing  to  help  solve  the  problems  arising,  the 
depression  could  have  been  averted  or  at  least  largely  miti- 
gated. 

We  bemoan  war,  as  we  should.  We  raise  a  great  outcry 
against  economic  loss  from  it,  as  we  should.  But  it  is  a  little 
known  fact  that  the  loss  sustained  by  securities  and  stocks 
of  raw  materials  and  merchandise  during  years  of  depres- 
sion and  forced  liquidation  is  greater  than  the  cost  of  car- 
rying on  the  greatest  military  campaign  in  history.  A  recent 
speaker  at  a  bankers'  convention  said  that  our  national 
wealth  had  increased  30  per  cent  during  the  war,  during 
which  time  we  grew  to  be  by  far  the  wealthiest  nation  in 
the  world,  but  that  our  entire  gain  had  been  wiped  out  dur- 
ing the  depression  of  1920-21.  His  statement  is  obviously 
only  partly  true  but  is  of  sufficient  import  to  set  us  think- 
ing. 


CHAPTER  XXIX 

SPECULATION,  THE  OUTSTANDING  CAUSE 
OF  DEPRESSIONS 

The  word  "speculation"  comes  from  the  Latin  "specu- 
lor,"  meaning  to  do  or  to  contemplate.  Defenders  of  the 
speculator  call  him  a  business  look-out  or  economic  fore- 
caster. There  are  those  who  claim  that  speculation  is  neces- 
sary, as  there  were  those  of  the  old  school  who  claimed 
gambling  on  the  grain  exchanges  in  imaginary  transactions 
was  a  real  benefit  to  the  farmer.  Modern  forms  of  specu- 
lation grew  up  with  the  Stock  Exchange.  The  first  reported 
stock  exchange  was  in  Antwerp  in  the  Fifteenth  Century. 
A  pamphlet  published  as  early  as  1542  described  the  "mon- 
strous thing  that  the  Antwerp  merchants  had  devised ;  they 
bet  with  each  other  on  the  course  of  foreign  exchange,  one 
saying  it  would  be  2  per  cent,  one  3  per  cent,  etc.,  and  after- 
wards they  settled  by  paying  the  differences."  This  is  sub- 
stantially the  same  operation  as  that  which  is  carried  on 
regularly  today.  In  the  Sixteenth  Century  speculators  on 
the  stock  exchanges  used  the  same  methods  still  in  vogue. 
They  would  set  rumors  afloat  to  depress  the  price  of  securi- 
ties and  then  buy  in.  Day  tells  in  his  "History  of  Commerce" 
that  "One  day  during  the  reign  of  Anne  in  England  a  well- 
dressed  man  rode  furiously  through  the  street  proclaiming 
the  death  of  the  Queen.  The  news  spread  and  the  funds 
fell ;  the  Jew  interests  on  the  exchange  bought  eagerly,  and 
were  suspected  later  of  being  responsible  for  the  hoax, 
though  it  was  not  proved  against  them." 

We  have  speculated  ever  since  we  have  known  what 
money  was.  In  the  year  1697  Professor  MacLeod  declared 
that  "The  frightful  convulsions  and  collapses  of  public  credit 
which  have  taken  place  during  the  last  three-quarters  of  a 
century  are  chiefly  due  to  this  great  wrong."  In  1719  the 


HISTORY  OF 


BUSINESS  DEPRESSIONS 


279 


word  "stock  jobbing"  originated  in  a  pamphlet  put  out  by 
an  Englishman  named  Child. 

In  another  chapter  I  have  described  the  relation  of  money 
to  depressions,  taking  the  stand  that  confidence  really  enters 
into  the  question  more  than  money  or  forms  of  money.  His- 
tory indisputably  proves  that  we  have  prosperity  when  we 
have  confidence,  and  depression  when  we  lack  confidence. 
What  brings  about  this  lack  of  confidence  ?  The  speculator 
who  buys  cheap  to  sell  dear,  who  gains  control  of  certain 
commodities  and  pushes  them  so  high  that  suddenly  there 
springs  up  a  lack  of  confidence  in  such  values,  resulting  in  a 
crash.  If  we  could,  by  sane  and  lawful  process,  eliminate 
the  worst  of  speculation  we  could  retain  normal  confidence 
so  as  to  eliminate  the  worst  of  depression. 

This  does  not  mean  that  there  should  be  a  curtailment  of 
the  credit  system,  but  that  credit  should  be  more  properly 
used  so  that  our  prosperity,  while  it  might  not  reach  such 
great  heights,  would  be  more  lasting  and  permanent.  Jay 
Gould  said  to  the  United  States  Senate  Committee :  "People 
will  deal  in  chance.  Your  minister,  doctor  and  barber  have 
all  the  same  interest  in  speculation."  Gould,  while  partially 
right,  was  judging  his  neighbors  by  himself.  Figures  do 
not  lie  and  the  blackboards  in  the  stock  exchange  tell  an 
interesting  tale.  They  amply  show  the  difference  between 
speculator  and  investor.  Let  us  take  the  figures  of  the  New 
York  Stock  Exchange,  during  the  year  1906,  which  was  a 
normal  year,  and  note  the  fluctuations  in  a  single  day : 


American  Smelting  Company  — 
Atlantic  Coast  Line  

1906 
High      Low 

174         138% 
167^     131% 

198%     135% 
240         192 
181$4     130% 
348         275 
184%     164 
136%     106& 
147%     122% 
164         112 

1907 
High      Low 

155           56% 
133%       58 

157%       93% 
205         126 
140%       74 
189^     107% 
172         116 
92%       44% 
141%     103% 
139%       70% 

Chicago,  Milwaukee  &  St.  Paul 
Common 

Chicago  &  Northwestern  

Consolidated  Gas         

Great  Northern  Preferred  
Illinois  Central 

Missouri  Pacific  

Pennsylvania  Railroad  

Readme 

280  HISTORY  OF   BUSINESS   DEPRESSIONS 

Can  any  one  look  at  these  figures,  knowing  the  history 
of  these  corporations  and  their  long  record  of  regular  divi- 
dend payments  without  default,  and  say  that  this  is  any 
other  than  gambling?  Is  it  possible  that  legitimate  invest- 
ors would  consider  Pennsylvania  railroad  stock  worth  147  Vk 
at  one  hour  in  the  day  and  122 1/2  at  another  hour  at  a  time 
when  its  solvency  was  unquestionable  and  had  been  unques- 
tioned over  several  decades? 

Members  of  the  New  York  Stock  Exchange  explain  that 
the  actual  value  of  the  stock,  as  based  on  dividend  payments, 
does  not  enter  into  these  fluctuations,  but  they  are  caused  by 
the  necessities  of  the  buyer  or  seller.  The  buyer  having 
certain  uses  for  more  stock,  such  as  for  control  of  the  direct- 
orate, would  pay  a  heavy  price  for  voting  stock.  On  the 
other  hand,  the  seller,  pressed  urgently  by  the  need  of  money 
because  of  some  tight  situation  he  is  in,  will  sacrifice.  Cer- 
tain conditions,  it  is  explained,  sometimes  cause  a  group  of 
men  to  have  the  same  object  at  the  same  time,  thus  these 
wide  fluctuations.  It  was  a  group  of  important  financiers 
which  became  involved  at  one  and  the  same  time  that  caused 
the  selling  orgy  and  brought  about  such  panics  as  1903. 

Henry  Clews  describes  speculation  as  follows:  "Specu- 
lation is  a  method  for  adjusting  differences  of  opinion  as 
to  future  values,  whether  of  products  or  of  stocks.  It  regu- 
lates production  by  instantly  advancing  prices  when  there  is 
a  scarcity,  thereby  stimulating  production,  and  by  depress- 
ing prices  when  there  is  an  over-production." 

If  the  speculator  alone  suffered  from  his  own  misdoings 
there  would  be  very  little  objection  to  the  practice,  but  the 
entire  public  is  buffeted  about  on  the  winds  and  waves  of 
the  depressions  which  are  of  his  making.  As  we  gain  ex- 
perience in  government  the  general  public  will  become 
awakened  to  the  havoc  wrought  by  the  professional  specu- 
lator who  usually  leaves  his  victims  to  pay  his  losses. 

Another  evil  of  speculation  is  the  large  amount  of  capital 
that  is  tied  up  that  would  otherwise  go  into  legitimate  chan- 
nels of  production.  As  an  example  of  the  evil  influences  of 


HISTORY  OF   BUSINESS  DEPRESSIONS  281 

speculations  on  borrowed  capital,  let  us  go  back  to  the  days 
preceding  the  1907  panic.  In  August,  1907,  an  offer  by  the 
city  of  Boston  of  $4,000,000  in  4  per  cent  bonds  brought 
bids  for  only  $200,000.  Three  days  later  an  offer  by  the 
city  of  New  York  of  $15,000,000  4  per  cent's  brought  bids 
of  only  $2,713,815  at  par.  Think  of  such  a  situation  when 
at  that  time  individual  deposits  in  national  banks  alone  were 
$4,322,880,141.  Remember  this  does  not  include  the  money 
in  state  banks,  trust  companies  and  savings  banks.  Imag- 
ine then,  if  one's  mind  is  capable,  of  the  enormous  sums  of 
money  that  must  have  been  tied  up  in  speculative  enterprises 
that  were  neither  liquid  nor  dividend  paying.  This  situ- 
ation was  brought  about  by  just  such  methods  as  were  de- 
scribed by  a  writer  in  Van  Norden's  Magazine,  December, 
1907:  "Mr.  Morse  first,  and  then  the  Thomases  and  the 
Heinzes,  had,  after  securing  one  bank,  hypothecated  the 
stock  of  that  bank  in  various  financial  institutions,  not  only 
here  but  all  over  the  country ;  had  taken  the  money  obtained 
by  a  loan  on  the  stock  of  one  bank  to  buy  stock  in  another, 
had  mortgaged  that  and  bought  into  still  another,  and  so  on 
and  on.  ...  Furthermore,  after  securing  control  of 
banks,  they  had  made  loans  to  themselves  for  the  flotation 
of  promotion  schemes  and  for  the  conduct  of  operations  in 
the  stock  market." 

Though  our  currency  may  contract  or  expand  to  take 
care  of  our  needs  without  shaking  the  structure  as  a 
whole,  and  while  we  now  have  the  best  and  strongest 
financial  system  we  ever  had,  yet  we  still  have  with  us  the 
root  of  most  of  our  troubles,  and  that  is  the  all  powerful 
desire  on  the  part  of  our  people  to  speculate,  to  get  rich 
quick.  If  we  can  stop  speculation  with  other  people's  money 
we  can  absolutely  stop  business  depressions,  outside  of  world 
catastrophe,  or  defeat  in  war.  I  do  not  go  so  far  as  to  say 
that  we  will  ever  stop  speculation  entirely,  admitting  that 
the  difficult  feat  of  legally  defining  speculation  could  be  over- 
come. The  speculator  is  a  person  of  evil  and  unworthy  in- 
tent. He  is  nothing  more  than  a  dignified  crap-shooter  or 


282  HISTORY  OF  BUSINESS  DEPRESSIONS 

race-horse  tout.  He  wants  to  play  for  big  game  at  the 
other  man's  expense.  He  has  a  burning  desire  to  obtain  the 
world's  goods  without  work,  either  mentally  or  physically, 
and,  incidentally,  is  usually  an  individual  endowed  with 
shrewdness  and  cunning.  In  his  transactions  he  uses  the 
people's  bank  balances  in  order,  in  turn,  to  rob  the  people. 
Taking  a  homely  example :  He  borrows  money  to  buy  real 
estate  which  he  sells,  many  times  at  an  enormous  profit,  and 
at  an  ever  increasing  figure,  until  prices  soar  beyond  reason. 
He  sells  the  property,  taking  a  small  payment  and  carries  it 
by  borrowing  the  people's  money  from  a  banking  institution, 
one  of  whose  depositors  he  robbed  in  the  transaction.  Even 
at  that,  so  long  as  man  is  created  with  shortcomings  evil  is 
bound  to  exist  in  the  world,  and  it  might  be  necessary  to  per- 
mit speculation,  with  its  attending  profiteering,  if  the  specu- 
lator's own  money  is  used  in  the  transaction.  A  remedy 
might  be  found  through  a  Federal  law  requiring  that  no 
national  bank  be  permitted  to  loan  money  to  any  individual 
or  corporation  without  an  accompanying  affidavit  that  the 
money  was  to  be  used  for  the  strict  promotion  of  legitimate 
production  and  not  for  speculative  purposes.  While  there 
will  be  criticism  directed  against  this  plan  on  the  grounds  of 
our  inability  to  define  speculation,  yet  it  is  undoubtedly 
feasible  and  practicable.  To  be  effective,  this  would  have  to 
be  followed  by  state  laws,  but  when  once  put  into  operation, 
one  state  would  follow  another  as  they  have  in  the  case  of 
"blue  sky"  laws. 

We  all  know  the  arguments  in  favor  of  the  speculator. 
Speculation  is  supposed  to  prevent  sharp  fluctuations  and 
soften  their  intensity  by  anticipating  events.  Speculation  is 
supposed  to  enforce  present  economy  in  the  face  of  probable 
future  want  and  so  is  claimed  to  prevent  famine ;  it  is  sup- 
posed to  even  up  supply  and  demand ;  it  is  supposed  to  create 
a  market  and  reflect  the  present  and  the  future.  It  is  doubt- 
ful if  it  is  necessary  to  any  of  these,  but  if  it  is,  let  it  be 
carried  on  by  men  who  use  their  own  money  and  keep  the 
credit  of  the  nation  in  production  channels.  When  men 


HISTORY  OF  BUSINESS  DEPRESSIONS  283 

borrow  other  people's  money  through  public  banking  insti- 
tutions, the  public  has  a  right  to  demand  that  it  be  used  to 
make  legitimate  profits  on  production,  giving  employment  to 
people,  and  allowing  the  public  as  a  whole  to  satisfy  their 
wants  through  the  use  of  their  own  money.  The  credit  sys- 
tem is  wrongfully  used  when  it  is  tied  up  in  channels  where 
it  is  used,  not  to  make  a  legitimate  profit  by  production,  but 
to  make  a  profit  by  raising  prices.  It  is  obvious  that  the 
speculator  can  profit  in  no  other  way  except  by  a  continual 
increase  in  price.  Yet  billions  of  dollars  of  capital  and 
credit  are  used  for  this  purpose.  Then  when  prices  have 
been  driven  up  until  the  public  rebels,  depression  must  neces- 
sarily follow. 

When  we  consider  speculation  in  its  broadest  sense,  we 
do  not  refer  simply  to  the  activities  of  the  stock  exchange 
operators,  but  to  a  general  class  who  buy  in  order  to  make 
a  profit  on  an  increase  in  price.  If  he  does  it  with  his  own 
money  and  loses  no  one  is  affected  as  a  rule  but  himself,  but 
when  he  does  it  on  other  people's  money  he  undermines  the 
very  foundations  of  our  financial  system.  What  remark- 
able laws  we  have  when  a  poor  man  is  forced  to  give  sixty 
days'  notice  to  draw  his  savings  at  a  time  when  the  wealth 
of  the  country  is  tied  up  in  the  hands  of  speculators  who  are 
robbing  that  very  depositor ! 

The  stock  and  grain  exchanges  are  beneficial  if  properly 
conducted,  because  they  act  as  an  instantaneous  reflector  of 
future  as  well  as  present  conditions.  They  act  as  a  preven- 
tion of  serious  overproduction.  Furthermore,  if  we  did  not 
have  exchanges  in  this  country,  such  as  cotton,  sugar,  grain, 
stock,  etc.,  we  would  be  left  to  the  mercy  of  exchanges  in 
foreign  countries.  Our  own  exchanges  many  times  have 
been  found  to  act  as  a  balance  against  wild  and  unfavorable 
fluctuations  in  the  exchanges  abroad. 

"In  an  ordinary  market  there  are  millions  of  securities 
purchased  and  held  on  speculation,"  says  a  financial  writer. 
"While  these  securities  are  regarded  as  belonging  to  the 
speculator  who  has  bought  them,  they  are  in  reality  in  pos- 


284  HISTORY  OF  BUSINESS  DEPRESSIONS 

session  of  the  banks  which  hold  them  as  collateral  for  loans 
they  have  made  upon  them.  The  money  lenders  and  bank- 
ers, therefore,  have  the  largest  amount  of  money  invested  in 
speculative  securities,  and  the  greater  proportion  of  this 
money,  it  must  be  remembered,  is  the  surplus  funds  of  the 
country  banks."  If  a  portion  of  this  money  was  taken  out 
of  speculative  channels  and  tied  up  in  legitimate  production 
and  merchandising  channels  there  would  be  more  general 
prosperity,  a  greater  distribution  of  wealth  and  less  liability 
of  destructive  depressions. 

Such  crises  as  those  of  1903  and  1907  were  brought  on 
from  absolutely  no  other  reason  than  that  an  unreasonable 
amount  of  the  country's  capital  was  tied  up  in  speculative 
channels.  When  we  have  stringency  investigate  specula- 
tion and  there  you  will  find  the  cause.  In  1903,  particularly, 
Mr.  Frank  Vanderlip,  then  Vice-President  of  the  National 
City  Bank  of  New  York,  predicted  the  trouble  a  year  ahead 
and  warned  against  ever-increasing  speculation.  In  specu- 
lative periods  there  is  often  not  an  actual  increase  in  values 
to  justify  extreme  prices,  but  only  imagination  buoyed  up  by 
false  ideas  of  prosperity  which  later  burst  and  we  are 
brought  to  earth  facing  stern  realities.  "Its  excesses,  when 
inspired  by  reckless  men  of  great  wealth,"  says  another 
writer,  "often  are  the  source  of  national  damage.  Thous- 
ands of  men,  ignorant  of  the  pitfalls  of  speculation  and  un- 
aware of  the  gigantic  odds  against  them,  are  annually 
ruined.  Fascinated  by  the  stories  of  great  fortunes  made 
by  speculators,  they  blindly  'plunge'  in  markets  where  only 
the  wisest,  shrewdest  and  best-informed  of  the  professionals 
stand  a  chance  of  winning  a  profit." 

Speculation  in  government  securities  in  England  is  il- 
legal. In  the  United  States  we  have  a  weak  law  prohibiting 
contracts  made  with  a  view  to  obtaining  a  "corner"  on  the 
market.  England  also  has  a  splendid  law,  only  partially 
enforced,  but  which  acts  as  a  deterrent,  prohibiting  the  en- 
hancement of  stocks  to  the  damage  of  the  purchasing  public. 
In  France  there  is  little  speculation ;  the  people  are  thrifty, 


HISTORY  OF   BUSINESS  DEPRESSIONS  285 

and  they  have  had  fewer  disastrous  panics  and  depressions 
than  any  other  commercial  nation.  Public  sentiment  in 
France  severely  condemns  a  man  who  acquires  the  name  of 
bankrupt  for  any  reason,  and  it  is  known  that  a  French 
family  will  submit  to  the  most  excruciating  poverty  to  keep 
this  stain  from  the  family  name. 

Through  the  pages  of  history  we  find  minor  depressions 
caused  by  bad  harvests,  uncertain  conditions  of  currency, 
political  uncertainty  and  other  causes,  but  practically  every 
major  panic  and  depression  which  marks  a  distressing 
epoch  in  the  commercial  and  industrial  history  of  the  world 
has  been  a  direct  result  of  speculation.  It  is  high  time  that 
we  curbed  this  monster.  How  long  will  we  stand  by  and 
witness  our  banks  fail,  business  men  in  bankruptcy,  invest- 
ors ruined,  workmen  in  despair,  all  for  the  profit  of  a  hand- 
ful of  speculators?  The  speculators  runs  prices  up  until 
he  reasons  they  have  reached  the  limit  that  people  are  going 
to  pay.  Then  he  gets  out  from  under  and  waits  for  the 
crash  to  come.  When  things  start  down  it  frightens  people. 
They  begin  to  curtail.  Money  becomes  tight.  Commercial 
failures  start  and  the  depression  is  on.  It  is  the  break  in 
values,  pushed  up  beyond  reason  by  speculation,  that  startles 
the  business  world.  When  prices  are  down  again  and 
"liquidation"  is  complete  the  speculator  again  starts  buying 
to  sell  later  at  enhanced  prices. 

Various  remedies  have  been  proposed  to  curb  speculation 
— one  by  requiring  that  "when  a  bank  shall  permit  its  money 
reserve  to  fall  below  20  per  cent  it  shall  not  increase  its 
liabilities  by  making  new  loans  other  than  by  discounting  or 
purchasing  bills  of  exchange  payable  at  sight,  and  would 
also  during  such  a  period  forbid  the  payment  of  dividends." 
Another  would  forbid  a  national  bank  from  "incurring  de- 
posit obligations  in  excess  of  ten  times  its  capital  and  sur- 
plus, also  limiting  speculative  loans  to  the  amount  of  a 
bank's  capital  and  surplus."  In  rare  cases,  however,  are 
bank  deposits  against  capital  and  surplus  shown  to  be  so 
excessive. 


286  HISTORY  OF   BUSINESS   DEPRESSIONS 

Every  sane  business  man  knows  that  there  is  a  well  de- 
fined demarcation  between  legitimate  buying  and  speculative 
buying,  and  that  line  can  soon  be  established  through  a  prac- 
tical trial  of  the  system.  Legitimate  business  men  and  home 
builders  will  thus  be  able  to  obtain  reasonable  sums  for  their 
needs  when  the  need  comes,  instead  of  finding  it  loaned  out 
to  speculators. 

The  Blue  Sky  Laws  of  the  various  states  have  helped  to 
curb  flotation  of  the  schemes  of  irresponsible  promoters,  and 
yet  these  stock  jobbers  know  that  they  use  the  United  States 
mails  to  sell  stock  that  the  individual  states  would  prohibit. 
To  show  what  little  progress  we  have  made  in  a  century  of 
time,  let  us  quote  Henry  English,  a  writer  who  had  a  full 
grasp  of  the  boom  of  1824  and  1825,  and  who  indulged  in 
some  criticism  at  the  time  which  it  is  interesting  to  recall  as 
being  applicable  to  the  present  day.  He  pointed  out  that 
prior  to  that  period  of  inflation  the  companies  formed  were 
"of  such  description  that  individual  capital  could  not  be  sup- 
posed to  be  adequate  for  the  completion  of  the  object  for 
which  the  company  was  formed.  A  majority  of  these, 
formed  during  1824-1825,  were  of  a  nature  adapted  only  to 
individual  enterprise.  The  deceptive  practices  resorted  to, 
to  obtain  a  price  far  exceeding  the  real  value  of  the  property 
(in  various  Mining  Companies),  can  only  be  explained  by 
the  guilty  participation  of  the  parties  in  the  spoils.  To  acts 
of  a  similar  nature  is  to  be  attributed  the  sacrifice  of  char- 
acter which,  in  too  many  instances  of  late,  has  been  the  re- 
sult of  the  proceedings  of  joint  stock  companies ;  when,  by 
the  connection  of  honorable  men  with  a  class  of  designing 
projectors,  the  innocent  have  been  implicated  with  the 
guilty.  It  is,  however,  to  be  hoped  that  the  lesson  thus 
taught  the  public,  and  more  particularly  men  holding  high 
stations  in  life,  will  be  the  means  of  preventing  a  recurrence 
of  the  events  of  1824  and  1825."  After  a  century  of  time 
how  little  progress  we  have  made!  Is  there  a  single  sen- 
tence in  this  man's  story  that  would  not  be  applicable  to  the 
present  day? 


HISTORY  OF  BUSINESS  DEPRESSIONS  287 

It  is  well  known  that  the  spirit  of  the  Federal  Reserve  Act 
has  been  violated  to  aid  and  encourage  speculation.  "It 
was  not  intended  that  the  paper  presented  for  rediscount 
should  have  been  drawn  to  carry  stocks,  bonds,  etc.,  or  goods 
in  warehouses  held  for  higher  prices ;  nor  to  aid  in  securing 
capital  for  fixed  investment  in  irrigation,  water-power, 
street-railway,  manufacturing  plant,  or  similar  purposes. 
On  the  other  hand,  it  was  intended  to  encourage  loans  based 
directly  or  indirectly  on  the  movement  of  goods  from  the 
producer  to  the  consumer."  But  many  instances  have  been 
shown  where  money  secured  through  the  Federal  Reserve 
has  been  used  for  speculative  purposes  and  to  obtain  higher 
prices.  There  are  so  many  ways  to  get  around  the  letter  of 
the  law  that  the  only  preventive  is  a  closer  supervision  by 
the  Board  over  the  member  banks  and  by  the  member  banks 
over  their  correspondent  banks. 

Almost  every  theory  advanced  as  a  direct  cause  of  de- 
pression is  proven  untenable  except  that  of  speculation. 
Those  who  have  advocated  bimetalism  and  paper  legal  ten- 
der as  a  cause  are  forced  to  admit  that  depressions  occur  in 
countries  on  a  strictly  gold  standard  basis.  They  occur 
alike  in  high  tariff  or  free  trade  countries,  in  nations  of 
stable  and  unstable  political  governments,  in  times  of  stable 
and  unstable  foreign  exchange.  When  we  have  had  de- 
pressions that  could  not  be  attributed  to  speculation,  they 
have  resulted  from  known  and  obvious  natural  or  political 
causes. 


CHAPTER  XXX 
THE  LABOR  QUESTION  IN  DEPRESSIONS 

As  a  whole  organized  labor  has  now  reached  a  high  pin- 
nacle. It  has  helped  the  struggle  of  the  masses  upward  to 
better  living  conditions.  Whether  from  now  on  it  will  be 
of  real  service  to  the  working  man  and  to  the  world,  or 
whether  it  will  be  self-seeking,  short-sighted  and  destructive, 
depends  upon  its  leadership.  Certainly  its  influence  is  going 
to  be  felt  in  commerce  and  industry  more  than  ever  before. 
Now  that  we  have  strengthened  our  financial  system,  labor 
is  going  to  be  the  big  problem  entering  into  the  causes  of 
future  depressions.  It  will  be  principally  up  to  labor  to 
make  or  unmake  industrial  peace  and  prosperity. 

Work  is  elevating,  and  it  is  neither  socialistic  nor  idealistic 
to  assume  that  if  man  wants  to  work  he  has  the  right  to  a 
chance  to  work.  To  fill  one's  time  with  profitable  production 
is  to  take  part  in  the  world's  onward  march  of  achievement. 
The  backward  races  are  adverse  to  work.  In  the  early  his- 
tory of  our  own  race  work  was  considered  degrading,  so  that 
we  should  feel  that  we  have  reached  an  exalted  state  in  our 
civilization  when  men  universally  have  the  will  to  work. 

Let  us  go  back  and  review  the  past.  Ptolemy  Philadel- 
phus,  a  successor  of  Alexander,  boasted  that  in  his  reign 
"No  citizen  was  idle  in  Alexandria.  Even  the  blind  and 
lame  were  taught  to  labour."  Labor  certainly  had  not 
reached  a  high  plane  in  the  year  1526  when  an  ordinance  by 
the  king  provided,  "That  the  scullions  in  the  royal  kitchen 
should  be  furnished  with  proper  clothing,  and  should  not 
'go  naked,  or  in  garments  of  such  vileness  as  they  now  do.'  " 
Women  did  the  hard  work,  and  it  sometimes  happened  that 
if  a  man  lost  a  horse  or  an  ox  he  married  a  wife  as  the  cheap- 
est plan  to  recoup  himself. 

Previous  to  thirty  years  ago  writers  almost  invariably 


HISTORY  OF  BUSINESS  DEPRESSIONS  289 

ascribed  as  one  of  the  causes  of  depression  the  use  of  ma- 
chines, thus  causing  over-production  and  creating  unemploy- 
ment. 

Lord  Playf air,  writing  on  this  subject  in  1888,  says :  "It 
matters  not  whether  the  countries  were  devastated  by  war 
or  remained  in  the  enjoyment  of  peace;  whether  they  were 
isolated  by  barriers  of  Protection  or  conducted  these  indus- 
tries under  Free  Trade;  whether  they  abounded  in  the  raw 
materials  of  industry  or  had  to  import  them  from  other 
lands ;  under  all  these  varying  conditions  the  machine-using 
countries  of  the  world  have  felt  the  fifteen  years  of  depres- 
sion in  the  same  way,  though  with  varying  degree  of  inten- 
sity." 

Labor  has  at  various  times  been  temporarily  depressed 
by  inventions  of  modern  machinery.  In  times  past  the 
guilds  and  unions  have  fought  the  introduction  of  various 
machines,  but  time  proved  that  they  were  really  a  boon  to 
labor  and  unions  now  take  a  different  course. 

In  the  Seventeenth  Century  working  men  protested  vigor- 
ously when  the  large  coaches  were  made,  which  carried  as 
many  as  eighteen  passengers,  making  the  distance  from 
London  to  York  in  four  or  five  days.  The  workers  pointed 
.out  "the  vast  amount  of  employment  those  eighteen  persons 
would  give  to  grooms,  farriers,  innkeepers,  hostlers,  sad- 
dlers, etc.,  if  each  were  to  ride  his  own  horse  instead  of 
adopting  the  revolutionary  practice  of  clubbing  for  a  com- 
mon conveyance." 

Depressions  have  always  been  a  serious  setback  to  the  or- 
ganized labor  movement.  The  first  attempt  to  organize 
working  men  in  this  country  was  met  by  a  counter  organi- 
zation of  New  York  employers  in  1836,  and  while  twenty 
striking  tailors  were  convicted  of  conspiracy,  yet  the  move- 
ment was  growing  in  force  until  the  panic  of  1837  gave  it 
the  final  blow.  The  crisis  of  that  year  put  a  complete  stop 
to  the  work  of  internal  improvements  and  left  thousands  of 
men  out  of  employment.  In  those  early  stages  labor  or- 
ganizations could  make  no  headway  against  unemployment. 


290  HISTORY   OF  BUSINESS   DEPRESSIONS 

As  the  decades  went  by  labor  was  able  to  form  again  in  bat- 
tle array,  but  time  and  again  it  was  hurled  back  by  the  de- 
pressions that  periodically  swept  the  country. 

At  the  outbreak  of  the  panic  of  1857  labor  had  four  na- 
tional unions,  together  with  a  considerable  number  of  scat- 
tered local  unions.  These  practically  were  wiped  out  of  ex- 
istence during  the  depression  of  that  year.  The  demand 
for  labor  during  the  Civil  War  which  followed,  and  the 
rising  cost  of  living  with  which  wages  had  not  kept  pace, 
gave  the  labor  organization  new  impetus. 

Labor  severely  felt  the  panic  of  1873  because  of  the  large 
influx  of  laborers  who  came  from  foreign  shores.  During 
the  period  of  business  prosperity  preceding  the  panic  there 
was  a  great  demand  for  labor  and  thousands  were  brought 
over.  Aliens  to  the  number  of  460,000  came  in  the  year  pre- 
vious, under  a  system  whereby  their  wages  were  pledged  to 
repay  their  transportation.  This  great  surplus  was  thrown 
on  the  labor  market,  and  in  the  panic  of  that  year  caused 
untold  suffering  and  gave  the  young  labor  organizations  a 
sharp  setback.  The  unions  were  not  strong  anyhow,  be- 
cause of  the  strike  of  1872,  brought  about  by  an  organization 
known  as  the  "Grand  Eight  Hour  League."  These  strikes, 
with  the  exception  of  the  building  trades  of  New  York  City, 
were  unsuccessful,  and  the  unions  went  into  the  panic  of 
1873  already  in  a  weakened  condition,  suffering  at  that  time 
further  reduction  in  wages  to  offset  the  decline  in  business 
which  brought  increased  dissatisfaction.  Two  important 
strikes  occurred,  namely,  on  the  Baltimore  and  Ohio  and  the 
Pennsylvania  Railroads,  in  which  violence  was  used  and 
property  destroyed,  and  armed  conflicts  took  place  between 
troops  and  strikers.  Some  European  newspapers  printed 
that  there  were  "three  million  tramps  in  America  out  of  a 
population  of  forty  million." 

After  this  depression  labor  again  made  headway,  secured 
increased  wages,  and  reached  a  higher  point  than  ever  be- 
fore. In  that  period  wages  steadily  advanced,  with  the  ex- 
ception of  a  short  period  during  the  depression  of  1884.  The 


HISTORY  OF  BUSINESS  DEPRESSIONS  291 

presidential  campaign  was  on  during  the  depression  of  this 
year  and  the  expression,  "pauper  labor,"  was  heard  on  every 
hand,  the  unemployment  situation  being  a  paramount  issue 
of  the  campaign.  During  this  year  a  million  men  were  re- 
ported idle,  but  the  depression  passed  without  serious  conse- 
quences to  labor,  and  further  upward  strides  were  made 
during  the  years  that  followed. 

The  depression  of  1893  was  marked  by  the  great  Debs 
Strike  and  Coxey's  Army.  Less  prominent  leaders  followed 
Coxey  in  raising  armies  of  unemployed,  among  them  Ran- 
dall, Browne  and  Kelley.  Returns  made  to  Bradstreet's, 
the  results  of  which  were  published  December  23, 1893,  show 
that  in  119  cities  801,055  men,  with  about  1,956,110  persons 
dependent  upon  them,  were  out  of  employment.  In  the  min- 
ing industry  labor  had  made  headway,  built  up  a  strong  or- 
ganization, and  had  favorable  contracts  with  the  operators 
prior  to  the  depression  of  1893.  Then  all  the  agreements 
were  broken  because  of  the  viciousness  of  the  times  and  the 
workers  received  a  severe  setback. 

The  crisis  retarded  the  steady  progress  labor  was  making 
during  the  rather  dull  times  preceding.  Idle  farm  hands 
tramped  the  country  in  search  of  work.  Unemployed  oper- 
atives crowded  the  streets  of  factory  towns  demanding  work 
or  food,  and  laborers  abandoned  the  mining  districts  and 
flocked  to  the  cities.  Unskilled  labor  was  prostrated  and 
the  ranks  of  skilled  labor  were  badly  shattered.  Special 
committees  were  organized  in  nearly  all  of  the  large  cities 
to  provide  food,  and  in  many  places  relief  work  by  public 
bodies  was  instituted.  In  the  Spring  of  1894  general  want 
and  distress  led  to  labor  strikes  and  riots,  as  in  Chicago,  and 
even  to  more  abnormal  outbreaks. 

In  1907  wages  of  the  cotton  mill  operatives  in  New  Eng- 
land were  reduced  10  per  cent.  Many  mills  closed  down, 
others  ran  part  time.  The  railroad  companies  proposed 
either  to  reduce  wages  or  increase  the  freight  rates,  prom- 
ising to  give  employment  to  thousands  more  men  if  the  in- 
crease was  granted.  Wages  were  not  generally  reduced 


292  HISTORY  OF   BUSINESS  DEPRESSIONS 

among  the  skilled  operatives,  but  thousands  were  laid  off. 
Later,  the  increase  in  rates  was  granted  despite  the  strong 
protests  of  business  men,  but  the  promised  return  of  pros- 
perity was  slow  in  coming. 

During  the  depression  of  1914,  when  the  nations  of 
Europe  were  tearing  at  each  other's  throat,  business  stagna- 
tion in  this  country  resulted  from  the  shock  of  closed  stock 
exchanges  and  stringent  money.  The  United  States  Steel 
Corporation  failed  to  pay  dividends  for  the  first  time  in  its 
history,  although  wages  were  not  cut.  Thousands  of  men, 
however,  were  laid  off  until  war  orders  began  to  come  from 
the  other  side. 

In  the  depression  of  1920  organized  labor  was  hard  hit. 
Officials  admitted  that  they  had  faced  the  worst  crisis  in 
their  history.  The  American  Federation  of  Labor,  which 
had  gloried  in  a  position  of  supremacy  in  the  labor  move- 
ment of  the  world,  suffered  enormous  losses  of  members.  It 
was  reported  that  between  one  million  and  one  and  a  half 
million  members  dropped  from  their  rolls  after  the  depres- 
sion set  in.  At  the  peak  of  its  strength  the  organization  had 
approximately  four  million  members.  Financial  stringency 
became  so  acute  with  the  organization  that  it  was  necessary 
to  furlough  most  of  the  paid  organizers.  Officials,  however, 
made  the  prediction  that  labor  would  emerge  from  the  storm 
stronger  than  ever. 

In  these  periods  of  economic  distress,  when  misery 
reaches  its  limit  and  forbearance  is  no  longer  a  virtue,  mut- 
terings  of  discontent  grow  into  clamor  and  tumult.  They 
have  changed  the  course  of  the  economic  world,  often  the 
political  world,  and  their  echoes  reverberate  through  the 
chapters  of 'history.  Labor's  greatest  antagonist  is  busi- 
ness depression.  Organized  labor  has  overcome  all  obsta- 
cles, it  has  fought  and,  it  may  be  truthfully  said,  has  won 
against  the  lock-out,  open  shop  and  other  deterrents,  but  it 
is  absolutely  at  the  mercy  of  industrial  depressions.  No  ac- 
cusing finger  has  ever  been  pointed  at  labor  as  guilty  of 
bringing  about  depressions  and  their  resultant  afflictions 


HISTORY   OF   BUSINESS  DEPRESSIONS  293 

until  the  depression  of  1920.  But  labor's  post-war  greed 
was  almost  as  great  as  that  of  capital.  Since  the  previous 
depression  labor  had  adopted  new  tactics.  Their  business 
agents  delved  into  the  records  of  the  various  industries. 
These  records  were  becoming  more  and  more  open  to  the 
public  as  regulation  of  business  came  on.  The  labor  repre- 
sentatives were  able  to  ascertain  just  what  industries  were 
earning  big  profits  and  proceeded,  through  the  strike,  to 
gain  for  themselves  all  the  traffic  would  stand.  As  a  whole, 
labor  acted  very  fairly  during  the  war.  While  excessive  de- 
mands were  made  in  many  cases,  labor,  under  the  patriotic 
leadership  of  Samuel  Gompers,  loyally  supported  the  war, 
and  arbitration  was  in  most  cases  easy  to  obtain.  During 
the  inflation  period  brought  on  by  the  war  labor  profiteered 
probably  to  an  equal  extent  with  all  other  profiteers  in  every 
line  of  endeavor.  Probably  this  statement  would  not  be  in 
order  but  for  the  inexcusable  lowered  efficiency,  which  was 
as  bad  as  the  utter  lack  of  service  on  the  part  of  capital. 
Business  men,  as  a  rule,  were  willing  to  pay  the  high  wages 
demanded  at  the  time  had  they  been  given  efficient  labor  in 
return.  This  is  the  first  depression  in  our  history  that  labor 
must  rightfully  bear  its  part  of  the  blame  for  bringing  on. 

We  shall  have  to  wait  until  a  decade  or  two  have  passed 
before  American  business  interests  will  realize  what  they  es- 
caped in  the  post-war  period.  With  radical  leadership  we 
would  undoubtedly  have  experienced  the  same  troubles  as 
happened  in  Germany,  Austria,  Italy  and  England.  It  may 
be  a  long  time  before  labor  again  has  the  same  able  leader- 
ship as  it  has  had  under  the  trying  times  of  the  Gompers' 
regime.  Long  after  he  is  gone  business  will  turn  to  pay 
him  honor  and  point  to  his  regime  as  an  example  of  sanity  in 
leadership. 

Labor  will  save  itself  from  many  setbacks  by  following 
its  more  conservative  leaders.  In  1921,  at  the  height  of  the 
depression,  the  marine  engineers  who,  as  a  result  of  war 
conditions,  had  built  a  powerful  organization,  were  receiv- 
ing an  extremely  high  wage  scale.  They  struck,  against  the 


294  HISTORY  OF   BUSINESS  DEPRESSIONS 

advice  of  their  president,  William  S.  Brown,  one  of  the 
ablest  labor  leaders  in  the  country,  and  a  member  of  the 
President's  Unemployment  Conference.  They  lost,  of  course. 

During  the  depression  of  1920-21  the  unemployed  were 
placed  on  the  auction  block  in  Boston  and  their  services  sold 
to  the  highest  bidder.  The  plan  was  attempted  in  other 
cities,  but  prohibited  on  the  grounds  that  it  accomplished 
nothing  in  the  way  of  a  permanent  solution  of  the  problem. 

The  International  Machinists  Union,  under  President  Wil- 
liam H.  Johnston,  sought  to  bring  a  revival  in  business  by 
securing  orders  through  their  Union  from  foreign  countries. 
The  Mexican  Government  placed  large  orders  for  machin- 
ery in  this  country  under  the  supervision  of  the  Interna- 
tional Machinists  Union.  President  Johnston  also  attempt- 
ed to  go  to  Russia  on  the  same  mission,  but  was  prevented 
by  radicals  who  had  gone  from  America  to  the  Bolshevik 
country. 

In  October,  1921,  the  International  Labor  Board  gave  fig- 
ures of  the  estimated  unemployment  as  follows : 


United  States More  than  3,000,000. 

Canada Sixteen  per  cent,  of  organized  labor. 

Japan 232,000,  including  3,000  sailors  in  Kobe 

alone. 

Britain The  European  country  hardest  hit — nearly 

2,000,000  officially  inscribed. 

Switzerland 22,000  wholly  and  90,000  partially  unem- 
ployed. 

Denmark Sixty-five  thousand. 

Norway Seventeen  per  cent,  of  organized  labor. 

Sweden 35,000  wholly  and  42,000  partially  unem- 
ployed. 

Holland Sixteen  per  cent,  of  organized  labor. 

Belgium 153,000. 

France (Which  was  one  of  the  countries  least  af- 
fected), 120,000  wholly  unemployed. 

Italy 110,000  wholly  and  300,000  partially  un- 
employed. 

Czechoslovakia  ___37,000. 

Germany The  climax  of  unemployment  was  in  Sep- 
tember, 1920;  in  1921  only  3  per  cent,  of 
the  workers  were  wholly  unemployed. 

These  figures  are  admitted  to  be  low.     They  do  not  in- 


HISTORY   OF  BUSINESS   DEPRESSIONS  295 

elude  unorganized  workers.     Some  statisticians  claim  double 
the  number  given  here  were  out  of  employment. 

The  Idaho  Legislature  passed  an  act  establishing  the  right 
of  every  person  who  has  resided  in  the  State  for  six  months 
to  ninety  days'  public  work  a  year  at  90  per  cent  of  the  usual 
wage  if  married  or  having  dependents,  otherwise  at  75  per 
cent  of  the  usual  wage. 

Duluth,  Minn.,  adopted  the  policy  of  building  sewers 
throughout  the  winter  in  order  to  equalize  the  amount  of 
unemployment.  Detroit  found  the  digging  of  sewers  in 
frozen  ground  no  more  expensive  than  under  the  blazing 
summer  sun. 

Business  circles  will  respond  more  quickly  to  the  disrup- 
tion caused  by  labor  troubles  than  anything  else.  There 
may  be  a  nation-wide  strike,  such  as  a  railroad  or  miners' 
strike,  and  business  will  immediately  feel  the  effects.  Local 
strikes,  of  course,  will  not  cause  general  depression  nor  will 
a  general  strike  cause  prolonged  business  distress,  because 
neither  side  can  afford  to  hold  out  long. 

If  financial  and  natural  conditions  were  sound,  the  effects 
would  be  over  in  a  short  time  and  business  resume  its  nor- 
mal course,  so  that  labor  troubles  cannot  be  ascribed  as  an 
underlying  cause  of  business  depressions,  but  an  important 
contributing  factor.  It  is  the  general  exorbitant  demands 
and  inefficiency  of  labor  that  frightens  capital  and  cause 
buyers'  strikes. 

The  average  laboring  man  is,  of  course,  not  educated  to 
the  point  where  he  can  reason  for  himself  from  a  scientific, 
economic  standpoint.  He  feels  many  times  that  he  has  been 
crushed  and  that  his  employer  has  profited  too  greatly  from 
his  labor.  That  leads  him  to  go  to  extremes  when  he  gets 
the  opportunity,  which  is  not  the  right  way  to  correct  the 
evil  of  profiteering  on  the  part  of  capital.  He  should  not  as- 
sume a  right  to  profiteer  just  because  another  man  does. 
"Two  wrongs  do  not  make  a  right." 

A  case  at  point  is  found  in  English  history  beginning  in 


296  HISTORY  OF  BUSINESS  DEPRESSIONS 

the  year  1824,  after  the  law  passed  by  Parliament  a  quarter 
of  a  century  previous  which  forbade  combinations  of  labor : 

"Upon  the  repeal  of  the  law  against  combinations  the 
hopes  of  the  workers  soared.  They  had  come  to  believe  that 
by  combination  they  might  achieve  everything  for  which 
they  longed.  A  workman's  paradise  was  to  be  instituted  at 
once  by  the  activities  of  unions,  which  were  now  at  liberty  to 
work  in  the  open  with  no  threatening  shadow  of  imprison- 
ment hanging  over  their  leaders.  Trade-unions  sprang  up 
like  mushrooms  overnight.  On  all  sides  there  were  strikes 
for  higher  wages.  Unfortunately  for  the  hopes  of  the  work- 
ers a  business  panic  occurred  in  England  which  forced  the 
manufacturers  to  close  their  mills.  All  the  strikes  failed  of 
their  purpose,  and  many  of  the  workmen  could  find  nothing 
to  do  and  were  saved  from  starvation  only  by  charity. 
Many  of  the  unions  broke  up  and  workmen  lost  faith  in  their 
organizations." 

As  the  years  go  by  labor  becomes  more  specialized.  The 
modern  workman  when  employment  is  scarce  in  his  trade 
waits  for  it  to  pick  up.  When  most  of  us  were  boys  a  work- 
man was  more  or  less  a  "Jack  of  all  trades."  When  he 
could  not  work  at  his  own  trade  he  was  supposed  to  work  at 
anything  he  could  get.  Outside  of  common  labor  that  is  not 
the  rule  these  days. 

At  a  meeting  of  women  workers  held  in  New  York  during 
the  depression  of  1893  an  appeal  was  being  drawn  up  for 
their  aid,  and  included  in  it  was  a  request  to  the  women  of 
the  wealthy  class  not  to  cut  off  their  luxuries.  There  is  a 
certain  class  of  people  who  have  an  assured  income  which  is 
affected  only  slightly  in  periods  of  depression.  These  people 
could  do  a  patriotic  service  by  buying  liberally  so  as  to  give 
employment  to  those  who  are  not  so  fortunately  situated. 
They  should  keep  in  mind  that  they  have  incomes  only  be- 
cause others  work  and  produce,  so  they  themselves  are  de- 
pendent on  the  well-being  of  others.  The  labor  leader  of  the 
future,  however,  must  prepare  to  advise  his  followers  along 
more  correct  lines.  Labor  is  developing  some  splendid  and 
able  leaders,  men  who  are  paid  salaries  as  high  as  the  earn- 
ings of  the  average  business  man.  President  Stone,  of  the 


HISTORY  OF  BUSINESS   DEPRESSIONS  297 

Railroad  Engineers  Union,  was  recently  voted  $25,000  a 
year  salary.  It  is  these  men  the  country  must  look  to  for 
proper  guidance  of  the  labor  movement,  so  that  the  public 
will  not  have  occasion  to  react  against  the  abuses  of  labor, 
as  well  as  the  abuses  of  capital.  My  experience  as  an  em- 
ployer is  that  the  average  business  man  does  not  object  to 
paying  a  good  wage.  His  experience  teaches  him  that  a 
good  wage  means  money  to  spend  beyond  bare  necessities,  a 
portion  of  which  will  come  back  to  him.  Employers,  too, 
have  a  right  to  demand  an  honest  day's  work  for  an  honest 
day's  pay.  They  have  a  right  to  expect  willingness  and  per- 
sonal interest  and  co-operation  on  the  part  of  the  workmen, 
and  if  this  is  unstintingly  given  public  sentiment  will  stand 
solidly  behind  labor  for  a  round  and  healthy  wage  and  reas- 
onable hours. 

Labor  today  is  a  big  element  in  considering  risks.  The 
manufacturer  who  is  advantageously  situated  as  to  low 
power  and  transportation  costs,  together  with  a  lower  wage 
scale  or  greater  efficiency,  has  a  distinct  advantage  over 
another  manufacturer  where  the  opposite  conditions  pre- 
vail. Where  labor  costs  are  high  and  efficiency  relatively 
lower,  the  manufacturer  will  not  take  the  risk  of  making  up 
stocks  in  dull  times,  but  will  shut  down  awaiting  definite 
orders,  so  that  the  buyer  absorbs  costs  and  lessens  the  risk. 
More  co-operation  on  the  part  of  labor  in  this  direction 
would  help  to  keep  the  factory  going  on  part  time  even 
in  the  most  serious  depression.  The  manufacturer  with 
high  labor  costs  is  first  to  suffer  loss  when  the  market  for 
his  article  weakens,  so  that  he  cannot  be  expected  to  keep 
his  employees  at  work  making  stock  for  the  future  when 
depression,  either  local  or  general,  sets  in.  The  American 
laborer  should  by  all  scientific  standards  be  more  proficient 
than  those  of  other  countries.  He  is  the  best  off  materially, 
has  more  of  the  comforts  of  life  which  should  create  an  in- 
centive, and  with  the  saloon  gone,  taking  away  the  constant 
temptation  to  drink,  he  is  physically  and  mentally  in  better 
condition. 


298  HISTORY   OF  BUSINESS   DEPRESSIONS 

Contrary  to  the  general  belief,  labor  has  been  growing 
more  efficient.  In  the  textile  trade  statistics  show  that  the 
average  production  per  man  in  1880  was  $1600  per  annum, 
and  in  1900  was  $1700  per  annum.  The  average  of  recent 
years  would  hardly  be  fair,  because  during  the  war  period 
large  numbers  of  new  and  inexperienced  hands  entered  the 
factories. 

Some  business  men  condemn  labor  as  a  whole,  but  they 
should  not  overlook  the  fact  that  the  unions  of  skilled  work- 
men under  the  American  Federation  of  Labor  kept  the  coun- 
try from  a  state  that  might  have  bordered  on  anarchy  during 
the  war  period  and  immediately  following,  when  labor  had 
the  upper  hand  and  was  very  hard  to  control.  Some  thought 
the  unions  demanded  excessive  wages,  and  yet  statistics 
show  that  they  did  not  ask  for  anything  like  the  increase 
that  was  demanded  and  given  to  the  unskilled,  itinerant 
workers  of  the  Bolshevist  type.  For  instance,  the  wages  of 
unorganized  labor  more  than  doubled,  while  the  organized 
unions  estimated  it  at  40  per  cent  increase.  The  organized 
unions  were  far  more  reasonable  in  their  demands  and  were 
always  a  restraining  influence,  without  which  we  would  un- 
doubtedly have  had  more  or  less  of  the  anarchy  which  swept 
over  all  the  European  countries. 

When  prosperity  is  general  labor  begins  to  fight  for  a 
share.  In  most  cases  business  men  must  give  in  because 
they  cannot  afford  to  fight  while  there  is  a  chance  to  make 
money.  Labor  wins.  And  then  another  group  makes  de- 
mands with  the  same  results.  This  continues  until  the  dis- 
putes become  vicious.  Then  capital  gets  cautious,  no  new 
enterprises  are  undertaken,  and  if  it  happens  that  other  ad- 
verse conditions  come  about  at  the  same  time  the  signal  is 
automatically  given  and  another  depression  sets  in. 

Business  depressions  throw  out  of  employment  an  average 
of  one  out  of  every  five  wage-earners,  which  is  a  great  na- 
tional calamity.  It  is  a  loss  to  the  nation  in  spending  power 
of  over  four  billion  dollars  per  annum.  What  we  lose  in 
depressions  could  easily  pay  our  national  debt. 


HISTORY   OF  BUSINESS   DEPRESSIONS  299 

As  early  as  1856  Carroll  D.  Wright,  special  commissioner 
on  American  Trade  Depression,  reported  that  "if  the  em- 
ployers in  any  industry  would  combine  under  an  organiza- 
tion that  should  have  positive  coherence,  there  would  be  no 
difficulty,  so  far  as  that  industry  is  concerned,  in  regulating 
the  volume  of  production  in  accordance  with  the  demand." 

One  of  the  early  excuses  given  by  those  who  formed  trusts 
in  America  was  that  they  would  help  regulate  the  law  of 
supply  and  demand  and  avoid  industrial  depressions  in  the 
future.  It  may  have  helped  some,  but  they  have  fallen  far 
short  of  the  promised  goal. 

In  the  early  days  of  trade  unionism  the  unions  took  the 
stand  that  wages  should  be  regulated  by  the  price  of  the 
product,  and  they  were  willing  to  accept  wages  based  on 
that  principle. 

The  coal  miners  of  England  went  into  an  agreement  of 
that  kind  with  the  employers,  who  formed  an  organization 
known  as  the  "Coal  Sales  Association,"  but  after  the  agree- 
ment went  into  effect,  the  Coal  Sales  Association  for  some 
reason  went  out  of  existence  and  the  employers  abandoned 
the  idea. 

This  plan  was  also  tried  in  1865  by  a  trade  union  of  pud- 
dlers,  known  as  the  United  Sons  of  Vulcan,  in  the  steel 
works  around  Pittsburg,  who  made  an  agreement  with  their 
employers  to  base  their  wages  on  a  sliding  scale,  according 
to  the  price  of  the  product.  They  had  a  commission  which 
had  access  to  the  prices  made.  With  the  change  in  the 
method  of  making  iron  this  union  later  amalgamated  with 
other  organizations  who  discontinued  that  method  of  deal- 
ing with  employers. 

As  before  stated  the  history  of  organized  labor  shows 
that  they  get  their  hardest  knocks  in  periods  of  de- 
pression. It  is,  therefore,  to  their  interest  to  help  devise 
means  of  avoiding  depressions.  A  simple  and  easy  way 
would  be  to  take  up  again  the  old  sliding  scale  principle  so 
that  they  can  avoid  violent  reductions  in  wages,  and  at  the 


300  HISTORY  OF  BUSINESS  DEPRESSIONS 

same  time  reap  the  profit  to  which  they  are  entitled  in  pros- 
perous times. 

It  seems  that  this  would  be  a  good  method,  both  to  halt 
strikes  and  to  avoid  the  connection  that  trade  unions  have 
in  bringing  about  depressions  because  of  necessary  read- 
justment. 

Under  present  conditions,  when  both  prices  and  wages  get 
too  high,  finance  and  employers  get  together  to  curtail  pro- 
duction in  order  to  force  a  lower  wage.  This  is  done  with  a 
very  violent  shock  to  business  and  the  depression  often  times 
gets  out  of  hand.  There  is  no  reason  why  it  cannot  be  auto- 
matically done.  There  are,  of  course,  objections  to  the  plan. 
On  the  employers'  side  they  claim  that  a  certain  part  of  the 
output  is  sold  on  contract  at  prices  below  the  prevailing 
market,  but  certainly  there  can  be  an  average  arrived  at  by 
the  simple  process  of  mathematics.  Along  with  that  they 
should  put  in  their  agreements  an  understanding  of  uniform 
employment,  so  that  the  employer  may  not  turn  off  large 
numbers  of  men,  creating  a  great  army  of  unemployed,  but 
may  reduce  the  hours  per  week  when  curtailment  of  produc- 
tion is  necessary.  In  this  manner  everybody  would  have 
some  kind  of  a  job  and  it  would  simply  be  a  case  of  adjust- 
ing his  living  conditions  to  the  fluctuation  of  his  pay  and  the 
hours  per  week  that  he  can  work. 

We  can  solve  our  problems  best  by  recognizing  that  labor 
has  a  right  to  improve  its  condition.  As  Machiavelli  said : 
"A  free  government,  in  order  to  maintain  itself  free,  hath 
need,  every  day,  of  some  new  provision  in  favour  of  liberty." 

Ideas  have  also  been  advanced  along  the  lines  of  unem- 
ployment insurance.  If  this  plan  is  put  into  effect  em- 
ployees must  directly  or  indirectly  pay  for  it,  and  experi- 
ence is  that  they  will  not  do  it.  What  they  demand  is  a  cer- 
tain amount  of  money  to  spend.  What  is  put  away  for  them 
is  not  appreciated.  The  average  working  man  feels  that 
he  will  take  a  chance  on  the  future.  The  trouble  is  that 
when  he  gets  a  job  he  thinks  there  will  never  come  a  time 
again  when  he  will  not  have  one.  People  who  do  not  think 


HISTORY  OP  BUSINESS  DEPRESSIONS  301 

and  study  cannot  be  made  to  see  that  another  depression  is 
ahead.  We  have  never  gone  through  one  but  what  nine 
people  out  of  ten  are  sure  that  we  will  never  have  another, 
and  some  who  so  think  may  refuse  to  prepare  for  it. 

Labor  suffers  so  terribly  from  unemployment  due  to  in- 
dustrial depression  that  it  should  be  the  first  to  take  steps 
to  avoid  those  conditions  in  the  future.  Mr.  Halbert,  Gen- 
eral Superintendent  of  the  Board  of  Public  Welfare,  Kan- 
sas City,  in  "Persistent  Public  Problems,"  sets  forth  a 
good  idea: 

"Perhaps,  compulsory  unemployment  insurance  for  casual 
laborers  is  impossible,  but  if  the  opportunity  for  unemploy- 
ment insurance  was  universal  to  casual  laborers,  it  would 
create  a  rather  strong  moral  presumption  against  the  man 
who  refused  to  take  advantage  of  it,  and  a  certain  stigma, 
such  as  belongs  to  vagrants,  would  tend  to  attach  to  him, 
and  people  who  did  not  carry  cards  which  indicated  their 
standing  in  this  regard  would  be  at  a  disadvantage  in  get- 
ting employment." 

The  labor  leader  of  the  future  must  not  be  of  the  type 
who  creates  hatred  among  employers  by  organizing  men 
only  to  get  wages,  hours  and  conditions,  but  the  duty  of 
the  labor  organizer  and  business  agent  must  also  be  to 
"sell"  the  union  to  the  employer.  He  must  not  take  an  ar- 
rogant stand,  but  must  be  an  emissary  of  conciliation  to  get 
the  employer's  good  will  and  to  show  him  how  he  can  self- 
ishly profit,  himself,  by  employing  union  labor  at  such  terms 
and  conditions  as  the  unions  think  they  should  have.  The 
employer  cannot  be  blamed  for  dreading  conditions  that 
existed  immediately  previous  to  the  depression  of  1920. 
In  those  inflated  years  of  great  demand  and  scarce  labor  the 
employer  many  times  had  to  submit  to  being  cursed  and 
abused  by  his  employees.  He  saw  their  efficiency  lowered, 
and  their  arrogance  became  such  that  it  was  no  pleasure  to 
do  business.  It  is  safe  to  say  that  thousands  of  business 
men,  before  they  would  go  through  such  an  experience 
again,  would  lock  the  door  of  their  factory  and  go  fishing. 
True,  the  employer  many  times  was  equally  as  guilty.  He 


302  HISTORY   OF  BUSINESS   DEPRESSIONS 

mistreated  and  abused  the  public.  He  profiteered  and  gave 
no  service.  Such  conditions  are  not  good  for  anybody.  Why 
is  it  that  we  lose  our  heads  when  we  have  prosperity?  Why 
cannot  we  deserve  prosperity  ?  All  of  this  backs  up  the  ar- 
gument of  some  that  unemployment,  depressions  and  hard 
times  are  a  necessary  evil  connected  with  a  larger  good. 

If  labor  cannot  profit  by  recent  history  it  can  go  back  to 
the  Tudor  period  in  England,  when  the  guilds  made  such  re- 
strictions as  to  apprentices  and  other  conditions  that  they 
began  to  cramp  the  rising  manufacturing  industries  which 
chafed  under  the  vexations  and  began  moving  into  the 
smaller  and  remote  towns.  The  unemployed  in  the  Sixteenth 
Century  were  indeed  unfortunate,  because  a  law  was  passed 
at  that  time  in  England  providing  that  if  an  able  bodied  man 
was  found  "begging  a  second  time  he  was  to  be  mutilated  by 
the  loss  of  the  whole  or  a  part  of  his  right  ear." 

The  question  with  us  should  not  be  what  to  do  with  the 
unemployed  individual,  but  rather,  why  is  he  unemployed?" 
This  will  lead  to  wide  study  by  the  public  of  periodic  indus- 
trial depressions. 

We  must  face  the  fact  in  the  future  that  labor  is  going  to 
demand  the  right  to  work,  and  they  are  likely  to  be  in  posi- 
tion to  enforce  it.  Wise  employers  will  begin  to  devise  a  sys- 
tem through  which  he  can  keep  all  of  his  employees  under 
almost  any  condition.  He  must  work  out  a  plan  of  shorter 
hours  and  correspondingly  shorter  pay,  or  short  layoffs  by 
rotation.  Unemployment  affects  not  only  the  unemployed, 
but  our  whole  economic  structure,  and  we  are  drawing  to  a 
point  in  our  civilization  where  we  must  find  an  orderly  way 
outside  of  the  precepts  of  socialism  to  give  every  family  head 
the  right  and  opportunity  of  steady  work.  If  we  neglect  this, 
forgetting  it  during  our  prosperity,  as  we  are  wont  to  do, 
we  are  sure  to  invite  further  depressions,  resulting  in  far 
greater  costs  than  an  equitable  solution  would  entail.  The 
dole  system  in  vogue  in  England  at  the  present  time  will 
never  prevail  in  America.  Our  people  do  not  believe  in  sup- 
porting non-workers.  There  is  plenty  of  work  to  do  entirely 


HISTORY  OF  BUSINESS  DEPRESSIONS  303 

outside  of  production  which  might  at  the  time  be  all  suffi- 
cient. How  much  better  it  would  be  if  England  would  spend 
her  millions  by  providing  and  requiring  a  reasonable  amount 
of  work.  Certainly  idle  men  can  be  used  to  beautify  and 
improve  public  property  so  that  their  time  is  not  wasted  in 
idleness  and  they  can  be  paid  for  making  the  world  a  better 
and  prettier  place  in  which  to  live. 

The  old-fashioned  employer  liked  to  discipline  labor  by 
creating  a  condition  of  unemployment,  but  we  have  all  come 
to  realize  that  unemployment  is  a  disease  that  undermines 
the  health  of  the  economic  body.  It  stops  demand  and  affects 
not  only  those  who  are  thrown  out  of  employment,  but 
frightens  others,  causing  the  curtailment  in  demand  of  every 
kind. 

The  Wisconsin  Legislature  has  had  before  it  an  employ- 
ment liability  law.  Professor  Commons,  of  the  University  of 
Wisconsin,  in  an  article  published  in  the  Survey,  says :  "The 
theory  of  this  proposal  is  that  expansion  of  credit  is  a  main 
cause  of  unemployment,  and  that  an  insurance  liability 
should  be  placed  on  the  manufacturer  against  the  day  when 
he  lays  off  the  workmen.  It  is  assumed  that  a  banker  will 
not  extend  credit  and  a  business  man  will  not  enlarge  his 
force  without  taking  into  account  this  liability." 

There  will  be  opposition  to  this  plan,  of  course,  but  cer- 
tainly it  is  more  nearly  an  American  plan  than  the  European 
system  of  accepting  unemployment  as  inevitable  and  de- 
pression as  necessary,  endeavoring  to  arrive  at  a  solution 
through  philanthropy.  The  states  of  Pennsylvania  and  Cali- 
fornia are  now  making  a  provision  for  the  control  of  public 
works  to  the  end  that  this  construction  might  be  done  dur- 
ing periods  of  depression  as  a  safeguard  against  unemploy- 
ment. 

Business  and  labor,  both  of  which  suffer  from  depression, 
should  find  a  common  interest.  On  the  one  hand  is  the  la- 
borer without  employment,  hopeless,  with  his  last  crust, 
willing  to  work  and  seeking  not  charity,  perhaps  with  a 
family,  and  on  his  mind  the  dreadful  knowledge  of  their 


304  HISTORY  OF  BUSINESS   DEPRESSIONS 

want;  yet  with  the  same  status  as  the  hobo,  the  tramp,  or 
the  bum.  He  vainly  seeks  employment,  goaded  to  despera- 
tion by  the  thought  of  those  who  need  his  wages,  until  he 
feels  that  there  is  no  spark  of  justice  left  in  the  world. 

Take  then  the  business  man.  What  stories  many  could 
tell,  those  self-made  men  who  struggled  for  years  through 
repeated  discouraging  periods,  building  up  the  institutions 
which  give  employment  to  men,  assuming  the  burdens  of  all 
the  economic  world.  To  these  men  all  of  our  millions  look 
to  provide  the  pay-roll.  Little  do  we  consider  them,  a 
comparatively  small  part  of  every  community,  who  furnish 
the  money  for  all  the  rest  of  us  to  spend.  The  sanitariums 
that  dot  the  country  attest  the  mental  strain  which  they 
undergo,  doubly  so  in  times  of  depression  when  additional 
troubles  are  heaped  upon  them  and  their  fortune  and  their 
life's  work  threatened  to  be  wiped  out.  These  two,  the  work- 
man and  the  business  man,  have  felt  the  same  dismay,  the 
same  tension  of  uncertainty.  They  ought  to  find  a  common 
ground  where  they  can  get  together  to  eliminate  these  peri- 
ods of  distress. 

"  'These  are  my  jewels,'  said  the  mother  of  the  Gracchi, 
and  she  embraced  her  two  sons." 

Why  cannot  capital  and  labor  join  in  brotherhood?  They 
are  the  jewels  of  humanity. 


CHAPTER  XXXI. 
AGRICULTURE  AND  DEPRESSIONS 

The  economic  history  of  American  agriculture  has  been  a 
record  of  great  forward  strides  and  increasing  prosperity, 
excepting  in  those  periods  when  the  hand  of  depression  was 
laid  upon  her  fair  fields.  The  outstanding  feature  of  eco- 
nomic history  is  that  depression  and  prosperity  have  suc- 
ceeded each  other,  just  as  civilization  and  anarchy  have  fol- 
lowed each  other  for  thousands  of  years.  America  is  prob- 
ably the  one  nation  in  the  world  that  has  never  had  a  fam- 
ine. Our  farmers  have  always  produced  in  one  commodity 
or  another,  or  in  one  section  or  another.  In  taking  the  crop 
statistics  of  the  country  as  a  whole  over  a  period  of  years, 
it  is  surprising  how  evenly  they  run  from  year  to  year  and 
how  steady  has  been  their  growth.  A  certain  school  of  econ- 
omists claim  that  the  constantly  recurring  trade  depressions 
follow  the  so-called  cycle  of  agricultural  prosperity.  They 
argue  that  following  a  period  of  depression  the  output  of 
agriculture  is  not  at  first  sufficient  to  keep  pace  with  con- 
sumption. The  crops  grown  bring  high  prices  because  of 
scarcity.  The  farmer  starts  spending,  marking  an  upturn  in 
business.  For  a  few  years  planting  increases  and  greater 
prosperity  results  in  a  greater  consumption  until,  finally, 
the  agricultural  output  increases  beyond  the  demand  of  con- 
sumers. As  soon  as  this  point  has  been  reached,  and  a  year 
of  large  carry-over  is  faced,  prices  decline  sharply,  bringing 
its  blight  to  the  farmer,  who  gets  low  prices  for  his  over- 
production so  that  he  is  usually  in  debt  and  unable  to  buy 
when  depression  comes. 

"Ceres,"  remarks  a  writer,  "is  triumphant  democracy  in 
the  prime  divinity  of  the  Republic."  We  are  by  far  the  great- 
est agricultural  nation  in  the  world.  The  last  census  showed 
that  48  per  cent  of  our  population  derived  its  living  from 


306  HISTORY   OF  BUSINESS   DEPRESSIONS 

the  farm,  so  that  agriculture  is  naturally  important  in  the 
cause  and  effect  of  the  trade  cycles  that  revolve  through  the 
years  of  our  history. 

The  history  of  the  Roman  Empire  records  periods  when 
agriculture  ascended  the  hills  of  prosperity  and  then  went 
down  again  through  the  valleys  of  depression.  It  is  not 
known  just  how  much  American  money  a  Roman  sesterce 
was  worth,  but  it  is  recorded  that  an  ass  sold  for  60,000 
sesterces.  Whether  they  had  profiteers  in  those  days  or  de- 
preciated money  is  not  recorded. 

There  could  not  have  been  a  depression,  but  rather  an 
inflation  of  agriculture  when  Marcus  Terentius  Farro,  a 
Roman  farmer  wrote :  "So  men  buy  cows  with  black  horns 
rather  than  with  white,  large  goats  rather  than  small  ones, 
and  pigs  with  long  bodies,  provided  they  have  small  heads. 
The  third  point  is  the  question  of  the  strain  to  be  desired. 
In  this  connection  Arcadian  asses  are  celebrated  in  Greece 
and  those  from  Reate  in  Italy,  so  much  so,  indeed,  that  in 
my  memory  an  ass  went  for  60,000  sesterces  and  a  team- 
of-four  at  Rome  were  valued  at  four  hundred  thousand." 

Depressions  in  the  early  centuries  were  largely  agricul- 
tural depressions  caused  mostly  from  over-production,  while 
in  other  years  there  would  be  crop  failures  and  famines. 
The  lot  of  the  agriculturist  in  the  manorial  period  was  at 
times  very  bad.  The  tenants  were  ill-treated  and  often  con- 
victed on  slight  cause.  The  year  1381  records  a  general 
movement  of  the  tenants  toward  greater  economic  and  so- 
cial freedom.  The  hard  feelings  engendered  took  violent 
form  in  the  Peasants'  Revolt,  known  as  Wat  Tyler's  Rebel- 
lion. 

In  the  early  history  of  modern  times  in  England  agricul- 
ture particularly  went  through  regular  periods  of  distress. 
These  depressions  were  a  serious  problem  and  later  brought 
on  regulatory  measures,  and  were  subject  to  numerous  in- 
vestigations to  determine  the  causes.  Francis  Austin  Chan- 
ning,  a  member  of  Parliament,  wrote  a  book  in  the  Eigh- 


HISTORY  OF  BUSINESS   DEPRESSIONS  307 

teenth  Century  called,  "The  Truth  About  Agricultural  De- 
pressions." 

Regarding  the  first  period  following  the  war  of  the  Revo- 
lution, Roosevelt  in  his  "Winning  of  the  West"  tell  of  agri- 
cultural conditions:  "The  prices  of  the  agricultural  prod- 
ucts of  the  West  were  absurdly  low,  a  cow  and  a  calf  being 
given  in  exchange  for  a  bushel  of  salt." 

Johnson,  in  his  "History  of  Domestic  and  Foreign  Com- 
merce," describes  the  agricultural  conditions  of  that  period : 
"The  farmers  of  the  grain-belt  still  found  themselves  in  dis- 
tressing circumstances.  The  fertile  soil  of  the  great  Ohio 
Valley  was  yielding  a  product  far  in  excess  of  the  demand 
that  existed  for  it,  and  each  year  found  an  increasing 
amount  of  unthreshed  or  unmarketable  grain  left  in  the 
fields  and  granaries.  Foreign  nations  that  profited  by  ex- 
porting their  manufactured  products  to  America  refused 
admittance  to  American  grain  and  flour,  and  though  the 
grain-producing  capacity  of  the  United  States  had  increased 
six-fold  since  1790,  the  annual  exports  of  flour,  beef,  pork, 
and  grain  were  but  little  more  than  the  average  for  the  five 
years  from  1790  to  1795.  Of  that  which  was  exported  but 
very  little  went  to  Europe,  the  chief  foreign  provision  mar- 
ket being,  as  in  colonial  days,  the  islands  of  the  West  Indies. 
The  plantations  of  the  South  were  drawing  much  of  their 
subsistence  from  the  northern  farms,  but  they  were  unable 
to  absorb  more  than  a  small  fraction  of  the  tremendous  sur- 
plus of  meat  and  flour  that  was  seeking  a  market.  In  1824 
corn  could  be  bought  at  Cincinnati  in  any  quantity  for  8 
cents  a  bushel.  Wheat  yielded  the  farmer  25  cents  a  bushel ; 
flour  sold  as  low  as  $1.25  per  barrel.  After  the  advent  of 
low  prices  the  high  costs  of  transportation  fell  more  heavily 
upon  the  farmer  than  before,  a  larger  proportion  of  the 
value  of  agricultural  products  being  sunk  in  the  expense  of 
carriage  to  market  than  of  the  value  of  any  other  commodi- 
ties." 

Drawing  a  picture  of  agricultural  conditions  in  the  de- 
pression of  1819,  Congressman  Martindale  in  a  speech  de- 
lievered  in  the  House  said : 

"While  this  process  of  waste  and  devastation  was  going 
on  the  provision-market  was  depressed  also.  There  was  lit- 
tle demand  for  the  farmer's  provisions,  for  his  beef,  pork, 


308  HISTORY  OF   BUSINESS   DEPRESSIONS 

and  wheat.  The  price  was  greatly  reduced.  But  the  habits  of 
the  farmer  and  his  family  were  formed,  and  suited  to  better 
times.  The  customs,  tastes,  and  fashions  of  the  country, 
and  his  immediate  neighbors,  imposed  a  kind  of  moral 
necessity  upon  him  to  measure  his  expenses  by  theirs,  not 
by  his  means.  His  expenses  were  greater  than  his  income. 
The  consequences  were  inevitable:  his  cash  was  first  ex- 
hausted, and  next  the  produce  of  his  farm ;  his  credit  next, 
and  (by  a  mortgage)  next  the  farm  itself.  The  expenses 
which  produced  the  mortgage  prevented  the  redemption. 
The  farm  is  sold  to  pay  for  foreign  goods,  and  the  merchant 
becomes  the  purchaser.  This  is  no  unreal  picture,  which  has 
no  original  in  nature." 

In  1815  public  land  sales  reached  a  million  acres  a  year. 
During  the  period  from  1816  to  1819  the  income  to  the 
government  from  the  sales  amounted  to  nearly  $30,000,000. 
Then  during  the  depression,  starting  with  that  year,  sales 
for  the  following  three  years  hardly  exceeded  $4,000,000. 
The  rise  in  the  price  of  cotton  from  26  to  34  cents  per 
pound  induced  larger  purchases  of  land;  exceeding  two 
million  acres  in  1817.  By  the  decline  of  nearly  half  in  the 
price  of  cotton  in  1820,  combined  with  other  causes,  land- 
purchasers  were  left  in  debt  to  the  government  more  than 
twenty-two  million  dollars,  and  with  a  change  from  the 
credit  to  the  cash  system  sales  were  reduced  to  much  less 
than  a  million  acres  annually.  In  1821  purchasers  were  so 
troubled  to  discharge  their  obligations  that  Congress  pro- 
vided that  instead  of  paying  the  balances  due,  they  might 
acquire,  if  they  desired,  an  absolute  title  to  a  portion  of 
the  land  purchased,  which  should  be  determined  by  the 
price  paid  and  the  amount  paid  thereon,  on  condition  of  re- 
linquishing their  ownership  to  the  remainder. 

In  our  early  history  the  West  Indies  were  our  best  cus- 
tomers for  agricultural  products.  The  worst  depressions 
our  agricultural  export  trade  has  experienced  were  during 
the  Revolutionary  War  and  Civil  War  periods.  In  times  of 
European  wars  and  various  European  crop  failures  there 
has  been  unusual  demand  for  our  food-stuffs  and  cotton, 
only  to  be  followed  by  slumps  of  more  or  less  severity  on 


HISTORY  OF  BUSINESS  DEPRESSIONS  309 

the  return  of  peace  or  normal  crop  conditions.  Agricul- 
tural exports  rose  to  a  high  level  in  the  years  1815  to  1818. 
The  surplus  cotton,  flour,  wheat,  tobacco,  rice,  corn  and  pro- 
visions that  had  accumulated  during  the  war  of  1812  were 
released  and  flowed  out  of  the  country.  In  1818  farm  com- 
modity exports  were  valued  at  over  $62,800,000. 

In  the  first  few  decades  of  our  national  history  the  price 
and  demand  for  flour  was  considered  the  barometer  of  busi- 
ness. If  flour  was  high  business  was  good,  because  it  de- 
pended almost  entirely  upon  agriculture.  If  there  were 
large  exports  of  flour  this  meant  the  people  could  buy  luxu- 
ries in  return  from  Europe. 

The  effect  of  inflation  on  values  is  shown  by  the  follow- 
ing estimate  of  the  values  of  certain  lands  in  Pennsylvania 
on  three  different  dates: 

1809 $  39  per  acre — approximately  normal  conditions 

1815 160  per  acre — bank  expansion,  great  prosperity 

1819 35  per  acre — after  the  panic  of  that  year 

In  1820,  when  the  depression  starting  in  1819  was  at  its 
worst,  wheat  sold  at  20  cents  a  bushel  in  Ohio  and  Ken- 
tucky. The  United  States  Gazette  of  that  period  said: 
"Whiskey  is  dull  at  fifteen  cents  a  gallon." 

The  first  speculative  mania  for  agricultural  lands  west 
of  the  Alleghanies  was  after  the  war  of  1812  and  previous 
to  the  crisis  of  1819,  when  people  were  swarming  into  that 
section.  Over  20,000  people  settled  in  Kentucky  in  one 
year  and  12,000  in  Tennessee,  together  with  large  numbers 
in  other  central  western  states.  When  the  crash  came  on 
this  new  country  was  desperately  hit.  Thousands  of  mort- 
gages were  foreclosed  and  their  would-be  purchasers  left 
homeless.  Still  greater  suffering  would  have  ensued  had 
it  not  been  that  in  some  states  relief  laws  were  passed 
staying  the  proceedings  against  foreclosure.  The  State  of 
Kentucky  attempted  to  establish  a  state  bank  to  help  the 
new  settlers  tide  over  on  their  land  purchase,  but  the  plan 
proved  unsuccessful. 


310  HISTORY  OF  BUSINESS  DEPRESSIONS 

The  period  from  1818  to  1830  was  an  era  of  general 
trade  recession  in  agricultural  commodities,  because  of 
peace  in  Europe,  which  lessened  the  demand,  and  through 
readjustment  of  general  conditions  in  America,  following 
the  panic  of  1819.  From  1830  to  1836  there  was  general 
improvement  in  agricultural  conditions.  The  opening  of 
the  Middle  West  increased  the  surplus  in  flour,  grain  and 
provisions,  and  the  ever  expanding  cotton  section  of  the 
South  furnished  its  share,  exports  rising  in  1836  to  over 
$90,000,000,  and  being  80  per  cent  of  our  total  export 
business.  The  panic  of  1837  followed,  bringing  irregular 
fluctuations  in  agricultural  products.  During  this  period 
cotton  was  the  only  farm  crop  that  increased  in  export 
shipments,  although  falling  prices  decreased  the  value  to 
the  farmers  by  millions  of  dollars. 

A  total  of  17,600,000  acres  of  government  land  had  been 
sold  in  1836,  a  territory  equal  to  Belgium  and  Holland 
combined,  bringing  into  the  national  treasury  $24,877,000. 

Then  came  the  depression  of  1837,  and  the  sales  fell  to 
5,601,103  acres.  It  was  the  large  surplus  which  accumul- 
ated in  the  Treasury  from  the  sale  of  these  lands  and  de- 
posited in  the  state  banks  that  brought  on  the  over-expan- 
sion and  speculation  resulting  in  the  panic  of  1837. 

In  the  speculative  times  previous  to  the  panic  of  1837 
"the  farmers  extended  their  acreage,  pawned  their  growing 
crops  for  the  money  to  increase  their  acreage  and  put  up 
grist  mills,  cotton  gins,  etc.  The  Mississippi  Valley  north 
and  south  was  heavily  mortgaged  to  eastern  bankers.  Many 
of  the  "wild  cat"  banks  were  loaning  irredeemable  currency 
to  land  speculators,  who  attempted  to  use  it  in  buying  gov- 
ernment land  in  defiance  of  the  law.  An  attempt  was  made 
to  stop  this  practice  and  require  payments  for  land  to  be 
made  in  gold  and  silver.  It  was  halted  by  President  Jackson, 
who  directed  his  Secretary  of  the  Treasury  to  require  gold 
or  silver  from  speculators,  but  in  case  of  bonafide  settlers 
bank  bills  should  still  be  received." 

Another  important  contributory  factor  leading  to  trouble 


HISTORY  OF  BUSINESS  DEPRESSIONS  311 

was  the  failure  of  the  American  crops  in  the  years  1835 
and  1837,  unfortunately  continuing  in  1838.  This  lessened 
the  purchosing  power  of  the  farmers  and  crippled  the 
merchants.  The  value  of  flour  and  grain  imported  into  the 
United  States  as  a  rule  was  insignificant,  while  that  ex- 
ported after  1830  was  on  the  average  about  six  million 
dollars  annually;  in  1837,  however,  the  exports  of  grain 
fell  off  nearly  a  million  dollars,  while  the  imports  of  grain 
were  increased  more  than  four  and  a  half  million  dollars. 
Previous  to  the  depression  of  1837  agriculture  on  the 
Atlantic  seaboard  had  begun  to  decline.  The  New  Eng- 
land farmers  lamented  the  spirit  of  speculation  which 
caused  the  migration  of  young  men  to  the  "back  country," 
as  it  was  called.  Southern  states  also  poured  their  surplus 
population  westward,  their  sons  going  to  the  unexploited 
gulf  states  and  into  Alabama,  Mississippi,  Arkansas  and 
Missouri.  Large  tracts  were  to  be  had  of  the  land  offices  at 
wholesale  prices,  and  these  were  bought  up  by  men  of 
means  or  influence  and  retailed  to  would-be  farmers  at  suf- 
ficient advance  to  realize  a  considerable  profit.  The  sales 
were  made  on  credit,  but  the  land  was  usually  mortgaged  to 
the  full  amount  of  the  deferred  obligation  so  that  ultimate 
returns  were  guaranteed,  provided  the  tract  was  so  situ- 
ated as  to  be  readily  salable.  The  barren  hill  farms  of  Mas- 
sachusetts, Vermont,  and  New  York  afforded  but  a  meager 
reward  to  labor  by  comparison  with  the  government  lands 
still  available  in  the  Mississippi  Valley,  and  in  consequence 
the  young  men  of  energy  and  ambition  were  drawn  to  the 
West,  "to  the  fertile  prairies  of  Illinois  and  Indiana  and  the 
alluvions  of  Ohio." 

In  the  short  depression  of  1848  agriculture  suffered  little 
because  the  English  Corn  Laws  had  been  repealed  in  1846, 
opening  up  a  new  market  in  that  country.  With  the  Mexi- 
can War  stimulant  agriculture  took  on  new  life,  and  for 
ten  years  experienced  unprecedented  prosperity.  The  for- 
eign exports  rose  to  a  hitherto  unknown  level  and  domes- 
tic demand  was  stimulated  by  the  rapid  settlement  of  the 


312  HISTORY   OF  BUSINESS   DEPRESSIONS 

Mississippi  Valley,  railroad  construction  and  the  gold  dis- 
covery in  California.  At  the  same  time  came  the  potato 
famine  in  Ireland,  bringing  great  demand  for  American  ag- 
ricultural products. 

Then  came  the  panic  of  1857  and  its  resulting  depression, 
lasting  until  the  outbreak  of  the  Civil  War.  During  the  ten 
years  preceding  1857  the  value  of  all  farm  property  in- 
creased over  100  per  cent,  a  growth  that  has  never  been 
achieved  in  any  country  or  in  any  age. 

In  the  beginning  of  1857,  when  prosperity  reigned  su- 
preme, the  Governor  of  the  Territory  of  Nebraska  said: 
"We  can  boast  of  flourishing  towns  and  prosperous  cities, 
with  their  handsome  church  edifices,  well  regulated  schools 
and  busy  streets.  .  .  .  The  appreciation  of  property  has 
far  exceeded  the  expectation  of  the  most  sanguine.  Busi- 
ness lots  upon  streets  where  the  wild  grass  still  flourishes 
are  readily  commanding  from  $500  to  $3,000  each;  lands 
adjacent  to  our  most  prosperous  towns  sell  readily  at  from 
$50  to  $400  per  acre.  Credit  is  almost  unknown  in  our 
business  circles;  no  citizen  oppressed  for  debt  nor  crippled 
in  his  energies  by  the  hand  of  penury  and  want;  but  all, 
encouraged  by  the  success  of  the  past,  look  forward  to  the 
future  with  eager  hopes  and  bright  anticipations." 

But  this  picture  of  prosperity  was  entirely  changed  by 
the  succeeding  depression  and  another  Governor  in  a  mes- 
sage to  the  Legislature  in  1859  had  this  to  say :  "It  is  a  mat- 
ter of  bitter  experience  that  the  people  of  the  Territory 
have  been  made  to  pass  through  the  delusive  days  of  high 
times  and  paper  prices,  and  the  consequent  gloomy  night 
of  low  times  and  no  prices." 

The  depression  of  1857  was  augmented  by  the  finest  har- 
vest ever  known  in  the  United  States,  which  happened  to 
fall  with  one  of  the  best  harvests  in  Europe,  making  wheat 
almost  unsalable. 

Cotton  exports  increased  from  1,667,000  bales  in  1846  to 
3,774,000  in  1860  and  from  a  value  of  $42,767,000  to  $191,- 
806,000.  Western  grain,  which  had  gradually  entered  the 


HISTORY  OF  BUSINESS  DEPRESSIONS  313 

foreign  trade  during  earlier  years,  now  for  the  first  time 
became  an  item  of  real  importance  and  caused  a  rapid  rise 
in  food  exports.  The  maximum  point  in  food  shipments 
was  reached  in  1857,  when  14,500,000  bushels  of  wheat, 
10,250,000  bushels  of  corn  and  3,712,000  barrels  of  flour, 
and  breadstuffs  of  all  kinds  valued  at  $55,500,000  were 
shipped  abroad.  The  panic  and  depression  occurring  at  the 
end  of  the  year,  together  with  the  bounteous  crops  in  Eu- 
rope, then  halted  the  great  export  movement  for  a  time. 

Some  years  ago  an  English  visitor,  apparently  with  an 
ample  imagination,  wrote  home  the  following  description 
of  an  Illinois  corn  field : 

"Nothing  but  corn  was  in  sight  over  the  great  level  plain. 
I  wandered  among  the  immense  stalks,  some  at  least  four- 
teen feet  high;  a  heavy  dew  had  been  falling  during  the 
night,  and  the  morning  sun  was  now  well  up  in  the  heavens. 
Crack  after  crack  resounded  like  pistol  shots.  It  was  the 
corn  bursting  its  coverings." 

Emigration  received  a  setback  during  the  depression  of 
1873,  doubtless  for  the  reason  that  prices  were  low  and 
money  to  get  a  start  in  the  West  was  not  available.  Land 
values  had  also  declined  seriously  and  speculative  spirit  was 
not  in  the  minds  of  those  going  west.  But  in  1878-79  the 
western  movement  was  resumed.  Depressed  times  of  that 
period  in  the  East  seemed  to  stimulate  the  western  move- 
ment. The  fall  in  prices  of  farm  products  had  preceded  the 
panic  of  1873. 

Farming  had  its  difficulties  in  the  depression  of  1873. 
The  pioneers  had  borrowed  heavily  from  eastern  mortgage 
companies  to  improve  their  farms,  and  if  they  made  the 
mistake  of  borrowing  a  small  amount  their  farm  was  usually 
foreclosed,  for  payment  was  utterly  impossible.  Those  who 
borrowed  large  amounts  were  better  off  because  the  mort- 
gage companies  allowed  them  to  stay  and  cultivate  the 
land,  hoping  to  get  their  interest,  at  least,  until  conditions 
improved.  But  in  either  event  thousands  of  mortgages  were 
foreclosed.  Money  was  so  scarce  that  farm  products  could 
not  be  moved  to  market. 


314  HISTORY   OF  BUSINESS   DEPRESSIONS 

Agriculture  of  the  East  has  felt  panics  less  than  the 
West  and  South,  obviously  because  that  section  was  older 
and  there  were  fewer  mortgages  carried,  and  the  section 
was  nearer  the  consuming  markets.  Eastern  agriculture 
suffered  worse  in  the  depression  of  1873  than  in  any  other 
period.  This  for  the  reason  that  thousands  of  farmers  went 
west  on  the  prosperous  tide  previous  to  this  year  to  open 
up  new  lands.  This  left  the  eastern  lands  with  lesser  de- 
mand, with  the  result  of  a  greater  falling  off  in  their  value. 

In  the  depression  of  1878  agriculture  was  favored  because 
of  an  abundance  of  cheap  labor  and  cheap  lands  which  en- 
abled the  farmers  to  produce  large  crops  at  small  cost.  The 
demand  in  Europe  happened  to  be  good  at  the  same  time  and 
great  quantities  of  exports  poured  out  of  the  country.  While 
industry  was  suffering  agriculture  was  in  fairly  good  shape, 
although  prices  were  low.  Our  exports  in  1878  were  more 
than  three  times  as  great  as  in  1876.  They  amounted  to 
over  $257,000,000  more  than  the  total  imports,  the  exports 
being  almost  entirely  agricultural  products.  The  good  crops 
and  large  exports  repeated  again  in  1879,  thus  pulling  the 
country  out  of  the  depression. 

In  the  depression  of  the  '80's  farm  mortgages  were  so 
tremendous  that  they  were  alarming.  These  mortgages 
were  held  by  eastern  and  European  capitalists  and  carried 
interest  from  1  to  3  per  cent  per  month.  An  idea  of  the 
situation  of  that  time  is  given  by  Henry  M.  McDonald, 
president  of  the  Traders'  Bank,  Pierre,  South  Dakota,  and 
printed  in  the  New  York  Times,  in  which  he  estimated  that 
"the  volume  of  western-mortgage  business,  confined 
chiefly  to  Kansas,  Nebraska,  Minnesota,  and  Dakota,  has 
reached  the  sum  of  $150,000,000  yearly.  It  may  exceed 
these  figures.  That  it  is  of  great  magnitude  is  evident  from 
the  fact  that  in  all  eastern  cities  (and  in  most  of  the  towns 
and  villages)  are  located  numbers  of  agents  who  make  a 
living  from  the  commissions  paid  them  for  securing  loans. 
Boston  numbers  more  than  fifty  agencies  of  farm-mortgage 
companies.  It  is  computed  that  Philadelphia  alone  negoti- 


HISTORY  OF  BUSINESS  DEPRESSIONS  315 

ates  yearly  more  than  $15,000,000  on  western  loans. 
Kansas  and  Nebraska  have  134  incorporated  mortgage 
companies.  The  companies  organized  under  the  laws  of 
other  states,  but  operating  in  these  two  states,  increase  the 
number  at  least  200.  In  this  reckoning  no  account  is  taken 
of  firms  and  individuals,  although  a  large  amount  of  money 
is  directly  invested  by  lenders  of  this  class.  One  feature  of 
importance  to  be  observed  in  this  mortgage  business,  is  the 
fact  that  the  chief  part  of  the  power  to  put  in  bonds  the 
lands  of  America  comes  not  from  the  country,  but  from  the 
city;  while  the  country  is  gaining  no  equivalent  power 
over  the  city  interests  of  any  kind." 

As  to  the  oppressive  nature  of  the  western  farm  mort- 
gages of  that  period  the  Chicago  Times  said:  "The  syndi- 
cates that  loan  money  at  from  1  to  3  per  cent  per  month  are 
mainly  made  up  of  Scotch,  English  and  New  England  capi- 
talists, who  have  their  agents  throughout  the  South  and 
West.  These  mortgages  are  falling  due,  and  soon  an  im- 
mense number  of  southern  and  western  farms  will  be  in 
the  hands  of  foreign  mortgagors.  The  territories  are  cov- 
ered with  mortgages  on  new  farms  not  yet  patented.  In 
many  districts  half  the  settlers  borrow  money  at  high  in- 
terest to  pay  the  small  price  required  by  the  government  in 
proving  up.  This  is  leading  to  wide-spread  disaster.  The 
object  of  the  pre-emption  law  is  perverted.  Eastern  and 
foreign  capitalists  get  the  land  with  such  improvements  as 
the  settler  has  put  upon  it.  The  settler  loses  all  by  reason 
of  the  exorbitant  interest  he  is  compelled  to  pay." 

The  wheat  crop  of  1884  was  the  largest  that  had  ever 
been  harvested,  and  the  price  fell  to  64  cents  a  bushel,  half 
that  obtained  three  years  before.  This  price  did  not  cover 
the  cost  of  production,  and  many  farmers  were  ruined.  The 
inability  of  the  agriculturalists  to  meet  their  obligations  to 
eastern  mills  and  workshops  extended  and  prolonged  the 
industrial  depression,  and  the  glut  of  the  market  became 
general. 

With  the  preceding  land  boom  and  over-development  dur- 
ing the  big  years  of  emigration  a  collapse  was  bound  to 
ensue,  and  the  progress  of  agriculture  was  greatly  retarded 


316  HISTORY   OF   BUSINESS   DEPRESSIONS 

because  of  the  heavy  burden  of  mortgages  and  the  instabil- 
ity of  farm  prices. 

After  the  first  of  August,  1891,  a  fortunate  turn  in  the 
international  grain  situation  brought  about  a  radical  change 
in  the  depressed  conditions  which  had  prevailed  in  the 
United  States  during  the  preceding  eighteen  months.  The 
wheat  crop  of  1891  in  the  United  States  was  the  largest  up 
to  that  time  which  had  ever  been  grown.  The  returns 
showed  a  yield  of  611,780,000  bushels  in  1891  against  399,- 
262,000  bushels  in  1890.  The  same  remarkable  increase  was 
also  true  of  the  corn  and  coats  crop.  Moreover,  the  cotton 
crop  in  1891  was  unprecedented.  The  most  significant  fea- 
ture in  the  situation,  however,  lay  in  the  fact  that  this 
extraordinary  increase  in  the  production  of  cotton  and  cere- 
als in  the  United  States  was  coincident  with  a  shortage  in 
European  harvests.  The  Russian  wheat  crop,  which,  next 
to  that  of  the  United  States,  was  most  largely  depended 
upon  by  European  consumers,  was  almost  a  total  failure. 
The  grain  shortage  in  France  was  one  of  the  most  serious 
in  the  history  of  the  country.  The  Russian  Government 
issued  a  ukase  against  the  export  of  rye  on  August  10th, 
and  another  against  the  export  of  wheat  on  November  21st. 
A  decree  removing  the  import  duty  on  wheat  was  also  pro- 
mulgated in  France.  The  market  for  American  grain  there- 
fore was  broad  and  eager.  On  account  of  the  small  crops 
of  the  two  years  1889  and  1890,  the  European  demand  for 
American  cereals  quickly  developed,  and  the  pressue  of 
export  grain  from  the  United  States  during  the  autumn  of 
1891  was  very  great.  The  export  of  breadstuffs  almost 
equaled  the  enormous  outward  trade  during  the  year  1879, 
following  the  resumption  of  specie  payments. 

Many  writers  insist  that  our  1893  panic  would  have  come 
in  1891  had  it  not  been  for  the  inflated  currency  which  post- 
poned it  until  another  day.  Gold  was  going  out  of  the 
country  in  great  sums  during  the  three  years,  but  in  1891 
scarcity  of  crops  in  Europe  brought  about  large  exports 
of  American  agricultural  products  and  this  had  a  tendency 


HISTORY  OF  BUSINESS   DEPRESSIONS  317 

to  bring  the  gold  back  and  even  the  balance  of  trade  for  that 
year.  The  next  year,  however,  our  agricultural  exports  fell 
and  we  had  a  balance  of  trade  against  us  of  $68,800,000. 

A  widespread  and  far-reaching  disaster  for  agriculture 
was  that  of  1893  and  1894,  when  the  combination  of  crop 
failure  and  low  prices  ruined  thousands  of  farmers.  Riding 
through  fertile  sections  of  the  states  west  of  the  Missis- 
sippi one  could  see  farmhouse  after  farmhouse  deserted, 
occupants  having  scraped  together  what  money  they  could 
and  returned  east,  where  they  could  find  refuge  among 
friends  and  relatives.  Others  remained,  eking  out  a  bare 
existence,  enduring  privation  and  hardships  described  as 
almost  beyond  hope.  Defaults  were  the  rule,  but  the  settlers 
who  managed  to  survive  the  adverse  times  undoubtedly  in 
later  years  were  better  off  than  the  ones  who  returned 
east.  The  year  1894  was  worse  than  1893.  This  year  wit- 
nessed the  greatest  crop  failure  of  any  single  season.  As 
figures  clearly  show,  a  small  increase  or  decrease  in  crops 
does  not  affect  business,  excepting  sentimentally;  but  "a 
great  failure,  such  as  was  witnessed  in  1894,  gives  the 
country  a  shock  from  which  it  may  take  several  years  to 
recover." 

In  1893  considerable  agitation  swept  over  the  East 
against  western  farm  loans.  Eastern  people  felt  the  panic 
of  that  year  and  resulting  depression  as  much  as  the  west- 
ern people.  With  the  prevalent  stringency  the  eastern  peo- 
ple began  to  look  into  their  affairs,  and  it  was  thought  that 
too  much  money  had  been  sent  west  at  high  interest  rates 
and  sunk  in  farm  loans  of  doubtful,  value.  It  is  indisputable 
that  western  loans  were  over-done  and  were  particularly 
of  a  reckless  nature.  In  previous  years  many  of  these  loans 
made  in  selected  fertile  sections  of  the  West  had  brought 
splendid  returns  which  led  to  the  general  impulse  to  pur- 
chase this  class  of  securities.  Eastern  money  poured  west 
in  such  abundance  that  the  nature  of  the  lands  was  not 
properly  investigated,  which  brought  loss  to  the  investors. 
The  mania  was  finally  restrained  with  the  panic.  Today, 


318  HISTORY  OF  BUSINESS  DEPRESSIONS 

however,  a  western  farm  mortgage  is  considered  the  best 
kind  of  security,  and  eastern  investors  are  not  able  to  secure 
enough  of  them. 

Agricultural  products  were  scarcely  affected  in  the  de- 
pression of  1903,  as  this  depression  was  confined  largely  to 
stock  issues,  many  of  which  found  a  lower  level  and  the 
companies  remained  solvent.  Agriculture,  on  the  other  hand, 
had  its  own  years  of  depression  entirely  aside  from  depres- 
sions in  the  stock  market.  In  such  years  as  1903  the  money 
stringency  affected  farm  commodities  only  by  preventing 
loans  and  retarding  somewhat  the  movement  of  the  crop. 

The  farming  interests  were  less  affected  than  any  other 
in  the  short  panic  of  1907.  Farmers  in  the  West  and  South 
boasted  that  they  were  laughing  at  the  discomfiture  of  the 
larger  cities,  and  at  New  York  in  particular.  It  is  quite 
true  that  the  local  banks  which  were  known  to  be  strong 
had  little  trouble  in  meeting  the  needs  of  their  depositors, 
and  country  districts  went  along  feeling  the  affects  to  some 
extent,  of  course,  but  in  no  degree  panicky.  The  healthy 
condition  of  agriculture  helped  largely  in  speeding  up  busi- 
ness after  the  depression  of  1907.  The  previous  year  agri- 
cultural products  yielded  $7,400,000,000  against  a  combined 
yield  of  mining  and  manufacturing  of  $3,000,000,000. 

If  figures  count  for  anything,  agriculture  did  not  feel  the 
depression  of  1907  in  the  least.  Starting  with  the  year 
1900,  the  total  value  of  farm  products  was  a  little  over  five 
billion  dollars.  It  gained  steadily  each  year,  reaching  six 
billion  in  1904  and  in  1906,  $6,755,000,000;  in  1907, 
$7,488,000,000;  and  in  1908  in  which  the  worst  of  the  de- 
pression was  felt,  it  was  $7,848,000,000;  jumping  next  year, 
in  1909,  to  $8,622,000,000. 

Against  those  figures,  production  of  pig-iron,  a  recognized 
barometer,  starting  at  13,789,000  tons  in  1900,  rose  stead- 
ily to  25,307,000  tons  in  1906 ;  25,781,000  tons  in  1907 ;  and 
dropping  to  15,936,000  tons  in  1908. 

Again,  take  also  the  total  bank  clearings  which  rose  to 
$157,000,000,000  in  1906;  $154,000,000,000  in  1907,  the  year 


HISTORY  OF  BUSINESS  DEPRESSIONS  319 

of  the  panic;  dropping  to  $126,000,000,000  in  the  year  of 
depression  following. 

Agriculture  was  affected  peculiarly  and  in  spots  at  the 
outbreak  of  the  European  War  in  1914.  For  instance,  cot- 
ton went  to  six  cents,  50  per  cent  below  normal  for  the 
period,  caused  by  a  sudden  halt  in  the  demand  from  Europe. 
The  "Buy-a-Bale"  movement  swept  the  South.  Corn  was 
stationary,  perishable  products  depressed.  Wheat  and  live 
stock  went  up  because  of  an  apparently  increasing  demand 
from  the  warring  countries. 

Agriculture  always  profits  from  war,  because  food  is  a 
prime  necessity,  ranking  equal  with  ammunition.  Govern- 
ments make  frantic  efforts  to  get  large  supplies  of  food 
stuffs  because  a  nation  at  war  knows  that  famine  is  even 
more  to  be  feared  than  the  enemy.  They  eagerly  buy  great 
quantities  of  food  stuffs  at  high  prices.  This  stimulates 
production  in  strictly  neutral  countries.  When  the  conflict 
suddenly  ends  agriculture  naturally  is  demoralized  because 
of  the  large  production,  many  times  competing  with  govern- 
ments that  have  laid  by  great  storehouses  of  food. 

The  depression  of  1920-21  was  peculiar  in  many  respects. 
Abundant  crops  usually  spell  good  times.  In  former  years 
the  announcement  that  bumper  crops  were  harvested  meant 
an  era  of  prosperity  ahead,  but  at  this  time  we  found  severe 
depression  and  great  suffering  in  the  midst  of  abundance. 
It  was  purely  a  reflection  from  war  conditions. 

Describing  the  adverse  conditions  of  agriculture  which 
prolonged  the  depression,  Dr.  Henry  C.  Taylor,  Chief  of 
the  Bureau  of  Markets,  United  States  Department  of  Agri- 
culture, said:  "In  the  city  there  is  unemployment,  in  the 
country  there  are  products  without  any  market — both 
amount  to  the  same  thing.  On  the  contrary,  they  simply 
can't  help  themselves.  The  ground  there,  it  had  to  be 
planted,  but  the  market  had  fallen  off  tremendously.  The 
reason  is  that  there  is  no  fair  price  exchange  between  farm 
products  and  city  products.  To  put  it  simply,  the  farmer 
has  to  buy  on  the  basis  of  a  20-cent-an-hour  wage,  whereas 
the  city  man  buys  on  the  basis  of  a  $l-an-hour  wage.  This 
condition  causes  depression  all  the  way  down  the  line.  I 


320  HISTORY  OF   BUSINESS   DEPRESSIONS 

understand  that  many  farm  machinery  factories  have  closed 
down  entirely,  and  the  remainder  are  doing  very  little 
business." 

He  pointed  out  that  althought  there  was  an  abundance 
of  farm  production,  that  fact  was  no  indication  of  prosper- 
ity for  the  farmer. 

In  the  1920  depression  the  movement  was  started  to  ship 
the  surplus  farm  products  to  Europe,  taking  in  exchange 
bonds  of  those  countries,  particularly  Germany,  which 
country  was  badly  in  need  of  supplies.  It  was  pointed  out 
that  we  had  better  have  German  bonds  than  rotten  products. 
On  the  other  hand  the  movement  was  opposed  particularly 
by  financiers,  because  they  thought  it  best  to  let  Europe 
work  out  its  own  affairs  rather  than  lean  too  much  on  us. 

In  some  quarters  over-production  was  given  as  the 
cause  of  the  depression,  but  that  was  hardly  true  because, 
while  we  did  produce  more  than  our  own  needs,  we  always 
do  so.  It  was  not  over-production  so  much  as  lack  of  proper 
international  finances.  What  we  over-produced  could  easily 
have  been  used  in  Europe,  half  of  which  was  starving,  and 
in  China,  where  another  great  famine  prevailed. 

The  farmers  suffered  during  the  inflation  period  previous 
to  the  depression  from  constant  strikes  of  railroad  men.  In 
many  instances  their  produce  was  lying  at  the  side  of  the 
railroad  track  instead  of  being  in  market  while  the  railroad 
men  were  striking.  This  caused  great  loss  in  many  cases  to 
the  farmers,  who  grew  bitter  against  the  labor  unions,  and 
this  accounts  to  a  large  extent  for  the  poor  showing  made 
by  a  group  of  radical  labor  men  who  attempted  to  form  an 
alliance  with  the  farmers  under  the  name  of  the  Farmer- 
Labor  Party  and  put  a  ticket  in  the  field  for  the  presidential 
election  of  1920. 

In  1920  America  received  its  first  agricultural  setback  on 
account  of  the  importation  of  foodstuffs.  The  farmers  made 
a  stronger  demand  than  ever  in  history  for  protective  duties 
on  products  of  the  farm.  Importations  of  Canadian  and  Ar- 
gentine wheat  helped  in  the  decline  from  $2.50  to  around 


HISTORY  OF   BUSINESS   DEPRESSIONS  321 

$1.10.  When  the  first  Congress  under  the  Harding  adminis- 
tration enacted  the  Emergency  Tariff  Law,  placing  a  duty 
of  35  cents  a  bushel  on  wheat,  the  market  responded  and 
wheat  went  up  about  20  cents  a  bushel.  For  the  first  time, 
also,  the  cotton  planters  demanded  a  protective  tariff,  re- 
versing their  years  of  tradition.  The  lowered  price  of  cot- 
ton, which  of  itself  was  largely  instrumental  in  bringing  the 
general  depression,  caused  the  planters  to  look  carefully 
into  the  underlying  conditions.  They  soon  discovered  that 
the  country  was  flooded  with  imported  vegetable  oils  and 
awoke  to  the  fact  that  cotton-seed  had  become  a  very  im- 
portant factor  in  the  cotton  industry.  During  the  war  they 
had  received  $55  a  ton  for  cottonseed,  which  years  ago  had 
been  thrown  away.  The  price  declined  to  $12  a  ton  because 
of  large  importations  of  soy  bean  oil,  cocoanut  oil,  peanut 
oil,  etc.,  from  the  Orient,  which  went  directly  into  competi- 
tion with  cottonseed  oil.  They  figured  that  had  they  re- 
ceived as  much  as  $30  a  ton,  which  they  felt  would  have 
been  a  fair  price,  it  would  have  meant  about  $400,000,000 
to  the  cotton  planters  of  the  South.  Hides  were  another 
commodity  terribly  depressed.  Farmers  claimed  it  would 
not  pay  to  skin  a  cow,  because  often  they  were  offered  a 
mere  pittance  of  50  cents  for  a  calf  skin  and  up  to  $1.50 
for  a  cow  hide.  The  story  went  the  rounds  of  the  press  that 
an  Iowa  farmer  spent  a  year  raising  a  calf  which  brought 
him,  including  the  hide  and  meat,  the  sum  of  $3.00.  He  then 
went  into  a  store  and  had  to  put  $9  more  on  top  of  that  in 
order  to  buy  a  single  pair  of  shoes.  Live  lambs  on  the  hoof 
brought  an  average  of  $1  in  Texas.  The  farmers  demanded 
duties  to  keep  the  cheap  hides  out,  which  came  in  from 
Mexico  and  Argentine,  and  to  keep  the  cheap  wool  out  from 
Australia  and  South  Africa.  It  was  pointed  out  that  we 
have  natural  facilities  for  growing  all  the  wool  we  use.  Great 
expanses  of  land  were  still  to  be  had  in  our  western  states 
for  wool  growing  so  that  we  could  give  employment  to  men 
and  keep  our  wealth  at  home,  and  yet,  through  the  low 
tariff,  we  imported  60  per  cent  of  all  the  wool  we  used. 


322  HISTORY   OF   BUSINESS   DEPRESSIONS 

In  1920  the  nation  lost  five  billion  dollars  by  the  decreased 
value  of  its  farm  production,  and  six  billion  dollars  in  1921. 
These  figures  are  not  arrived  at  by  deducting  the  loss  from 
the  unduly  inflated  prices  of  the  war,  but  from  reasonable 
prices  as  against  costs  at  the  time. 

In  recent  years  American  farmers  to  a  large  extent  joined 
the  capitalistic  class  by  payment  of  their  mortgages,  and 
what  financing  they  have  to  do  can  easily  be  taken  care  of 
by  the  country  banks,  which  can  rediscount  with  the  Fed- 
eral Reserve  Bank.  Until  1913  the  national  banks  were  pro- 
hibiting from  loaning  on  real  estate  or  accepting  farmers' 
commercial  paper  for  over  ninety  days.  These  provisions 
kept  the  national  banks  from  being  a  great  aid  to  agricul- 
ture. By  the  Federal  Reserve  Act  of  that  year  national 
banks  not  situated  in  Federal  Reserve  cities  were  permitted 
to  make  loans  based  on  improved  and  unencumbered  farms 
situated  within  their  respective  districts  to  amounts  not  ex- 
ceeding 50  per  cent  of  the  farm's  value,  nor  for  a  longer 
period  than  five  years.  It  also  permits  Reserve  banks  to 
rediscount  paper  issued  for  farm  purposes  or  for  certain 
farm  products.  This  system  has  no  doubt  helped  to  stabilize 
agriculture  through  depressed  times.  Farm  Loan  Banks 
have  also  been  a  help,  but  not  up  to  expectations;  in  fact, 
at  the  time  of  the  enactment  of  the  act  authorizing  these 
banks,  the  sponsors  boasted  that  it  would  be  the  means  of 
forever  ending  depressed  conditions  in  agriculture.  In  the 
recent  depression  farmers  complained  that  the  farm  loan 
banks  did  little  to  alleviate  conditions  and  that  in  a  large 
measure  it  had  failed  in  its  purpose.  These  opinions  proved 
premature,  as  the  Farm  Loan  Board  did,  late  in  1921,  after 
a  favorable  court  decision,  render  valuable  aid  to  the 
farmers. 

One  of  the  principal  aims  of  the  Farm  Loan  System  was 
to  relieve  pressure  in  time  of  depression.  In  former  times 
mortgages  coming  due  in  bad  years  would  find  the  farmer 
unprepared.  His  local  bank,  itself  affected  by  the  strin- 
gency, could  be  of  little  help,  and  after  one  or  two  exten- 


HISTORY   OF   BUSINESS   DEPRESSIONS  323 

sions,  perhaps,  the  mortgage  would  be  foreclosed.  Farmers 
may  now  secure  long-time  loans  at  low  interest  rates.  A 
loan  bank  must  have  a  paid-in  capital  of  $750,000.  In  the 
event  of  the  entire  capital  not  being  subscribed  by  indi- 
viduals, corporations  or  state  governments,  the  Secretary 
of  the  Treasury  is  authorized  to  subscribe  the  balance.  Only 
stockholders  can  be  accepted  as  depositors  in  the  Farm  Loan 
Banks  and  the  banks  are  prohibited  from  doing  a  general 
banking  business.  Loans  shall  be  for  not  less  than  $100  nor 
more  than  $10,000.  A  desirable  feature  of  the  Farm  Loan 
measure  is  an  arrangement  by  which  the  principal  is  paid 
by  installments  in  not  less  than  five  or  more  than  forty 
years.  After  a  mortgage  has  run  for  five  years  payments 
of  $25  or  multiples  of  $25  must  be  accepted  on  the  mortgage. 
The  farmers  have  always  contended  that  speculation  on 
the  grain  exchanges  had  a  tendency  to  affect  prices  ad- 
versely, and  have  repeatedly  sought  laws  to  curb  these  prac- 
tices, many  of  which  have  been  enacted.  No  doubt  the 
farmers  are  right,  particularly  in  their  opposition  to  the 
practice  of  selling  imaginary  commodities  or  transactions 
in  which  no  actual  commodity  is  involved.  Legitimate  grain 
exchanges  are  probably  necessary  in  order  to  create  an  or- 
ganized market.  Otherwise,  we  would  probably  place  our- 
selves in  the  position  of  following  foreign  grain  exchange 
quotations  and  be  at  their  mercy.  If  the  present  grain  ex- 
changes were  put  out  of  business,  it  is  only  a  question  of 
time  until  Winnepeg  or  Montreal  would  take  the  place  of 
Chicago.  In  each  depression  this  agitation  has  been  re- 
newed, and  each  time  certain  progress  is  made  in  eliminat- 
ing evils  that  have  been  practiced  to  the  detriment  of  the 
farmers. 

The  farmers  began  organizing  during  the  depression  of 
the  late  sixties,  and  each  period  of  distress  marked  further 
organization  among  them.  "The  Patrons  of  Husbandry" 
was  the  first  great  farmers'  organization,  which  later  be- 
came known  as  the  "Grange."  In  1880  the  "Farmers'  Alli- 
ance" was  formed.  "The  Farmers'  Mutual  Benefit  Associa- 


324  HISTORY  OF  BUSINESS  DEPRESSIONS 

tion"  was  also  organized  in  the  eighties  and  claimed  a 
membership  of  150,000.  During  this  period  the  farmers 
first  began  to  affiliate  with  the  labor  organizations.  Later 
the  "Farmers'  Union"  was  organized  and  became  strong. 
The  depression  of  1920  found  the  "American  Farm  Bureau 
Federation,"  claiming  a  million  and  a  quarter  members,  to 
be  the  strongest  farmers'  organization.  Some  of  the  other 
farm  groups  have  a  working  amalgamation  known  as  the 
"National  Board  of  Farm  Organizations."  The  organized 
farmers  were  able  to  secure  a  great  deal  of  advantageous 
legislation  in  1921,  which  helped  greatly  to  relieve  the  dis- 
tress in  agriculture  in  the  late  depression. 


CHAPTER  XXXII 
THE  TARIFF  AND  DEPRESSIONS 

The  tariff  question  has  entered  into  every  depression  the 
country  has  had,  without  exception.  It  is  a  fact  of  history 
that  we  have  invariably  turned  to  the  tariff  as  a  means  of 
relief  in  time  of  stress.  Lowered  tariff  rates  preceded 
almost  every  depression,  obviously  because  the  country 
became  flooded  with  foreign  goods,  which  eventually  forced 
our  factories  to  curtail  and  throw  men  out  of  employment. 
It  is  quite  true,  on  the  other  hand,  that  we  have  enjoyed 
prosperity  under  low  tariff  laws.  Several  periods  may  be 
cited  to  justify  this  statement,  and  yet  it  must  be  admitted 
that  those  periods  led  up  to  the  time  of  distress  when  we 
finally  paid  the  fiddler.  It  is  true,  also,  that  high  tariff 
cannot  be  claimed  to  be  a  panacea  for  the  evils  of  depres- 
sion, but  it  has  always  helped  us  out  of  depressions.  In  de- 
pressions we  have  great  armies  of  unemployed,  and  it  is  only 
natural  that  the  argument  arises  that  we  can  put  these 
unemployed  to  work  if  we  make  what  we  buy  ourselves, 
where  possible,  instead  of  buying  the  product  of  foreign 
workmen.  We  are  prone  to  forget  the  benefits  of  protection 
in  our  years  of  prosperity,  the  same  as  we  forget  to  save 
for  a  rainy  day.  The  argument  against  protection  is  that 
if  we  do  not  buy  from  foreign  countries  we  cannot  sell  to 
foreign  countries.  That  is  going  against  the  natural  flow 
of  commerce.  What  we  can  produce  and  manufacture  in 
this  country  within  a  reasonable  cost  of  production  we 
should  so  do,  and  we  will  still  have  ample  commerce  to  carry 
on  with  foreign  nations  in  such  commodities  as  we  cannot 
produce  here.  For  instance,  we  will  always  be  importers 
of  such  widely  used  commodities  as  coffee,  rubber,  burlap, 
tea,  cocoa,  spices,  hemp,  tropical  fruits,  and  a  long  list  of 
other  articles  which  cannot  be  produced  in  America.  If  we 


326  HISTORY  OF   BUSINESS   DEPRESSIONS 

take  the  natural  course  we  will  protect  and  produce  what 
nature  has  given  to  us  and  trade  with  those  countries  who 
cannot  produce  what  we  have  to  sell  and  who  do  produce 
what  we  must  buy.  It  is  quite  true  that  our  international 
bankers  made  loans  to  foreign  countries  that  they  are 
"sweating  blood"  to  get  back,  and  would  like  for  us  to  let 
the  barriers  down  and  buy  the  products  of  their  creditors 
so  that  they  can  collect  their  money.  We  may  be  influenced 
to  let  down  the  barriers  for  the  benefit  of  the  international 
banker  and  foreign  trader,  whose  citizenship  is  often  under 
foreign  registry,  but  if  we  do  we  will  bring  about  depression 
of  American  industries  just  as  sure  as  night  follows  day. 
We  have  reached  a  certain  plane  of  living  in  this  country 
and  we  cannot  go  back.  We  can  never  produce  as  cheaply 
here  as  abroad,  because  we  have  reached  a  high  standard  of 
living,  and  as  long  as  that  fact  exists  we  must  have  a  reason- 
able protective  tariff.  But  all  that  is  an  old  argument  and 
has  no  place  here  outside  of  the  point  that  when  we  are 
smitten  and  in  trouble  economically  we  turn  to  the  tariff  for 
help,  the  same  as  we  appeal  to  the  doctor  in  sickness  and  to 
the  Lord  in  grief. 

During  our  first  depression  in  1785  American  manufact- 
urers, who  had  built  up  their  industries  during  the  Revolu- 
tionary War,  found  their  trade  both  at  home  and  abroad 
greatly  diminished;  they  soon  realized  that  their  foreign 
trade  was  subject  to  greater  restrictions  than  had  prevailed 
prior  to  and  during  the  war,  and  they  found  as  well  that  it 
was  impossible  to  hold  the  domestic  markets  for  the  man- 
ufactured goods  that  competed  with  imported  products.  At 
the  close  of  the  war  the  duties  were  made,  at  first  for 
revenue  only,  but  later  for  the  twofold  purpose  of  providing 
protection  to  home  industries  and  trade,  and  raising  much 
needed  public  funds.  No  federal  government  had  as  yet 
been  established,  and  conditions  had  developed  in  the  United 
States  that  caused  the  New  England  and  most  of  the  Middle 
States  to  adopt  the  principle  of  moderate  protection  to  their 
own  industries,  and  to  make  tariff  laws  accordingly.  The 


HISTORY   OF   BUSINESS  DEPRESSIONS  327 

Southern  States,  not  having  manufacturing  industries  that 
suffered  from  foreign  competition,  and  being  large  pur- 
chasers of  foreign  goods,  did  not,  with  the  possible  excep- 
tion of  Virginia,  change  their  tariffs  along  protective  lines. 
A  group  of  citizens  presented  a  petition  to  the  General 
Assembly  of  the  State  of  Pennsylvania  November  30,  1785, 
calling  their  attention  to  the  adverse  effect  of  importations 
on  the  iron  industry  of  that  State,  and  asked  that  duties  be 
levied  on  such  iron,  claiming  that  the  local  industry  was 
entitled  to  public  protection  and  encouragement.  These 
tariff  laws  were  enacted  by  individual  states,  the  State  of 
Pennsylvania  acting  first  by  passing  an  act  "to  encourage 
and  protect  the  manufacturers  of  this  State  by  laying  addi- 
tional duties  on  certain  manufactures  which  interfere  with 
them." 

Following  peace  in  Europe  in  1815  prosperity  continued 
for  a  while  because  of  an  abundance  of  money,  but  manu- 
facturers began  almost  immediately  to  feel  the  pinch.  Many 
were  embarassed  and  others  entirely  abandoned  their  prop- 
erties. Those  that  were  left  petitioned  Congress  for  assist- 
ance, and  the  tariff  of  1816  was  granted.  Forty  memorials 
from  as  many  infant  industries  sent  petitions  to  Congress. 
The  tariff  of  1816  did  not  provide  for  high  duties  and  was 
passed  more  as  an  emergency  measure,  anyhow,  because  it 
provided  for  gradual  reduction  in  the  duties,  but  the  crisis 
of  1819  brought  about  a  stronger  public  feeling  in  favor  of 
more  protection  for  the  struggling  industries.  In  1818  the 
iron  interests  were  suffering  so  severely  that  a  duty  of 
75  cents  per  hundred  pounds,  or  $15.00  per  ton,  was  imposed. 
With  this  advance,  many  of  the  iron-works  in  the  country 
revived. 

During  this  depression  the  farmers  first  turned  strongly 
to  the  tariff.  There  was  no  foreign  market  for  their  sur- 
plus, so  they  resolved  to  create  a  domestic  market.  By  build- 
ing up  extensive  manufacturing  industries  at  home  it  would 
give  rise  to  a  non-agricultural  population  that  would  con- 
sume their  products.  The  English  Corn  Laws  were  still 


328  HISTORY   OF  BUSINESS   DEPRESSIONS 

in  force,  enacted  as  a  prohibition  against  American  imports 
in  years  of  normal  production  there. 

The  distress  that  followed  the  crisis  of  1819  "brought 
out  a  plentiful  promotion  of  domestic  industry,  of  petitions 
and  memorials  to  Congress  for  higher  duties."  The  move- 
ment undoubtedly  had  deep  root  in  the  feelings  and  con- 
victions of  the  people,  and  the  powerful  hold  which  protect- 
ive ideas  then  obtained  influenced  the  policy  of  the  nation 
long  after  the  immediate  effects  of  the  crisis  had  ceased 
to  be  felt.  The  notorious  "auctions,"  or  dumping  of  foreign 
goods,  which  caused  the  depression  of  1819  caused  the 
demand  to  go  up  for  higher  protective  duties.  Great  quan- 
tities of  imported  goods  were  taken  on  credit  and  disposed 
of  at  auction. 

Henry  Clay  at  that  time  was  a  protectionist.  He  pointed 
out  that  the  foreign  manufacturers  after  crushing  the 
domestic  manufacturers  had  immediately  raised  the  prices. 
Clay  and  other  friends  of  protection,  as  described  by  Bolles, 
had  advocated  the  doctrine  that,  "while  the  imposition  of  a 
higher  duty  for  a  time  might  enhance  prices  to  the  con- 
sumer, competition  at  home  would  reduce  them ;  so  that,  in 
they  end,  they  would  be  lower  than  if  our  dependence  were 
wholly  or  chiefly  on  a  foreign  market." 

It  was  the  protection  given  by  the  tariff  of  1824  that  no 
doubt  kept  us  from  having  a  serious  depression  in  1825  and 
1826,  during  the  years  of  the  great  European  depression. 
As  it  was,  we  experienced  a  minor  depression  in  that  year 
and  manufacturers  were  affected  even  then  by  the  great 
quantity  of  goods  pushed  into  this  country  by  the  force  of 
the  depression  in  Europe. 

Again,  during  the  short  depression  in  1828  manufacturers 
and  farmers  urged  protective  duties  which  had  gradually 
sagged  off  in  order  to  help  domestic  industries  and  relieve 
the  business  stringency  that  existed.  A  national  confer- 
ence was  held  in  Harrisburg,  Pa.,  which  urged  the  protec- 
tion of  all  industries  in  order  to  give  aid  to  American 
business. 


HISTORY   OF  BUSINESS  DEPRESSIONS  329 

The  compromise  tariff  of  1833  provided  a  gradual  reduc- 
tion tor  ten  years  and  Moore  says,  "While  these  changes 
were  taking  place  a  great  many  manufacturers  were 
crowded  out.  Some,  of  course,  were  not  progessive,  and 
since  they  were  not  up  to  the  times  they  could  not  compete 
with  those  who  were.  By  far  the  greater  part  of  the  failures 
up  to  1837,  however,  were  due  to  the  fact  that  lessening 
rates  under  the  compromise  tariff  allowed  many  European 
goods  to  come  in  at  a  price  that  drove  out  American  capital." 

It  was  during  the  tariff  agitation  following  the  depression 
of  1837  that  the  argument  was  first  advanced  that  Amer- 
ican labor  should  be  protected  from  competition  of  less 
highly  paid  foreign  labor. 

A  description  of  conditions  during  the  depression  of  1837 
is  vividly  drawn  by  a  contemporary: 

"The  price  of  wool  fell  in  the  domestic  market,  the  surplus 
wool  clip  was  sent  to  England,  and  many  of  the  costly  me- 
rino sheep  were  killed  for  mutton  and  tallow.  The  iron  man- 
ufacturers of  the  seaboard  put  out  their  fires.  All  but  five 
of  the  forty  plants  of  Morris  County,  New  Jersey,  were  pros- 
trated, the  works  were  sold  at  auction,  and  the  employees 
scattered.  Some  furnaces  and  forges  were  kept  running  by 
isolated  farmers,  but  the  eastern  industry  as  a  whole  was 
ruined.  The  iron  foundries  of  Pittsburg  were  adequately 
protected  by  the  expense  of  transporting  these  bulky  goods 
across  the  mountains,  where  fifty  miles  of  land  carriage 
cost  as  much  as  the  ocean  freight  from  Sweden ;  but  the  bag- 
ging industry  of  Lexington,  Ky.,  was  unable  to  cope  with 
English  competition,  for  imported  cotton  bagging  flooded 
the  country  at  prices  far  below  the  normal  cost  of  pro- 
duction." 

Another  report  says :  "The  cotton  manufacturers  of  Mass- 
achusetts, Connecticut  and  Pennsylvania  petitioned  for  pro- 
tection against  the  low-priced  goods  from  England  and  India ; 
the  paper  manufacturers  and  printers  protested  against  the 
competition  of  Holland  and  France;  the  sugar  planters  of 
Louisana,  the  cordage  manufacturers  of  Massachusetts,  the 
hat  makers  of  New  York,  the  gun-smiths  of  Lancaster,  Pa., 
and  the  proprietors  of  the  hemp  factories  of  Lexington,  Ky., 
were  no  less  insistent  on  protection." 


330  HISTORY   OF   BUSINESS   DEPRESSIONS 

Some  writers  describe  the  depression  of  1848  as  resulting 
from  the  decreased  duties  under  the  bill  of  1846.  Also,  ac- 
cording to  Von  Hoist,  "it  was  argued  at  the  time  of  the  panic 
of  1857,  and  has  been  maintained  since,  that  the  crash  was 
caused  by  the  low  tariff  of  1846,  which  led  to  large  exports 
of  specie  to  make  payments  for  foreign  goods  and  drained 
the  country  of  metallic  money."  Rhodes  and  other  writers 
take  the  oposite  view:  "In  this  reasoning  cause  and  effect 
are  confused,  and  in  part,  at  least,  inverted.  It  was  the  ex- 
port of  specie  which  increased  the  importations  of  merchan- 
dise and  not  the  importations  of  merchandise  which 
increased  the  export  of  specie." 

Dewey  says :  "The  reason  for  the  crisis  of  1857  is  still  the 
subject  of  controversy;  one  alleged  cause  is  the  lowering 
of  tariff  duties  in  1857;  and  some  protectionists  trace  the 
collapse  to  the  slow  but  poisonous  workings  of  the  tariff  of 
1846,  the  argument  being  that  the  reduction  of  duties  stim- 
ulated importations,  which  had  to  be  paid  for  in  specie,  and 
that  this  drain  of  specie  inevitably  caused  the  panic." 

It  was  hardly  true,  however,  that  we  were  drained  of 
specie  at  that  time.  Gold  from  California  furnished  an 
abundance;  but  too  much  of  it  was  sent  outside  instead  of 
building  up  our  own  industries. 

Some  of  the  leading  statesmen  of  the  time  believed  the 
low  tariff  was  the  principal  cause  leading  to  the  panic  as 
shown  by  remarks  of  Governor  Pollock  of  Pennsylvania  in 
his  message  to  the  Legislature  the  following  year,  in  which 
he  charged  the  troubles  of  the  time  principally  to  the  tariff 
then  in  force. 

During  the  Civil  War  high  tariff  duties  were  laid  on  im- 
ports, the  prime  object  being  to  raise  money.  Of  course, 
this  necessarily  protected  the  manufacturers  who,  seeing 
opportunities  for  safer  profits,  invested  in  their  business 
and  built  bigger  factories,  and  for  many  years,  when  these 
tariff  rates  were  left  alone,  our  industries  made  great 
strides.  Protection  became  a  national  policy,  the  Democrats 
lining  up  against  it,  and  the  Republicans  taking  the  oppo- 
site view.  The  high  protective  tariff  that  had  been  enacted 


HISTORY   OF   BUSINESS   DEPRESSIONS  331 

during  the  Civil  War  was  one  of  the  main  reasons  why  we 
did  not  have  an  industrial  collapse  immediately  following 
the  war.  The  tariff  kept  foreign  goods  from  being  dumped 
into  this  country  with  the  coming  of  peace  and  helped  to 
maintain  a  price  level  more  in  keeping  with  war  conditions, 
so  that  deflation  was  gradual. 

In  1872  the  tariff  was  revised  downward,  and  while  it 
cannot  be  said  to  be  the  direct  cause  of  the  crisis  of  1873,  it 
had  a  bearing  on  that  catastrophe.  That  must  be  admitted, 
because  in  1875  Congress  put  the  duties  back  to  where  they 
had  been  before  1872  as  a  relief  measure,  which  met  with 
little  opposition.  The  act  of  1872  repealed  the  duties  on  tea 
and  coffee,  halved  the  duties  on  wool,  and  reduced  the  duties 
on  imports  generally.  Friends  of  protection  insisted  upon 
the  restoration  of  the  tariff  and  the  rates  which  were  re- 
stored brought  material  prosperity  to  industry. 

The  revision  of  1882  was  intended  to  produce  greater  rev- 
enue, but  brought  no  benefit  to  the  agricultural  sections, 
which  favored  it,  because  it  disorganized  the  domestic 
market.  Some  attribute  the  short  depression  of  1884  to  the 
attempt  of  the  Democratic  administration  to  enact  the 
Morrison  bill  providing  for  an  average  reduction  of  20  per 
cent  in  the  import  duties  with  important  additions  to  the 
free  list. 

Britain  was  at  this  time  in  the  throes  of  a  tariff  argu- 
ment. "The  opinion  expressed  by  the  Royal  Commission," 
says  Curtiss,  "in  its  report  to  Parliament  in  1886,  that  the 
depression  in  trade  and  industries  was  due  to  no  exceptional 
or  temporary  causes  has  been  confirmed  by  the  experience 
of  recent  years  which  have  followed.  That  system  of  free 
trade,  or  free  imports,  which  in  1885  was  sapping  the  vitals 
of  British  industries,  was  the  essential  cause  of  the  loss  of 
profits,  reduced  wages,  lack  of  employment  and  universal 
stagnation  in  business." 

Following  the  enactment  of  the  McKinley  bill  in  1890  the 
business  of  the  country  was  stimulated  and  the  years  1891 
and  1892  were  fairly  prosperous.  Previous  to  the  act  of 


332  HISTORY  OF  BUSINESS   DEPRESSIONS 

1890,  in  Harrison's  administration,  importations  of  foreign 
goods  exceeded  in  value  that  of  any  previous  year.  The  out- 
flow of  gold,  necessitated  by  the  large  trade  balance  thus 
created,  caused  severe  money  stringency  and  a  panic  among 
the  banks  of  New  York,  Philadelphia  and  Boston  which 
issued  clearing  house  certificates.  When  the  high  tariff  law 
went  into  effect  the  situation  was  almost  immediately 
relieved. 

The  Wilson  Bill,  enacted  in  1894,  did  not  please  the  people 
nor  aid  the  Government  in  collecting  revenues.  The  tariff 
was  blamed  for  the  prolonged  depression  during  the  Cleve- 
land administration.  The  election  of  1896  returned  the 
Republicans  to  power  and  a  new  protective  measure  was 
passed,  which  again  started  the  hum  of  industry. 

The  duty  on  sugar  had  always  been  a  source  of  large 
revenue  for  the  Treasury,  and  when  all  these  were  lowered 
and  taken  off  of  sugar  entirely  the  Treasury  was  practic- 
ally empty  following  the  1893-94  depression.  So  depress- 
ing was  the  Wilson  tariff  on  business  that  many  Democrats 
favored  higher  duties. 

The  panic  of  1907  so  disturbed  business  conditions  that  a 
new  adjustment  was  desirable,  and  the  Payne-Aldrich  Bill 
was  enacted,  revising  the  tariff  to  needs  existing  at  that 
time. 

The  results  of  the  tariff  enactment  of  1913  were  just 
beginning  to  be  felt  when  the  European  War  broke  out. 
Both  sides  made  counter-claims;  protectionists  that  busi- 
ness would  have  been  ruined,  and  the  free  traders  that  time 
would  have  proven  the  benefits  of  the  measure.  However, 
after  the  war  our  markets  were  left  exposed  to  the  great 
surplus  caused  by  stimulated  production  in  all  the  non- 
warring  countries. 

We  well  know  how  the  silk  industry  of  MacClesfield,  Eng- 
land, decayed  and  pulled  that  once  flourishing  city  down 
with  it  when  silk  manufactures  were  admitted  to  England 
free.  We  also  know  how  Patterson,  N.  J.,  sprung  from 
nothing  to  a  great  industrial  center  under  protection  of 


HISTORY  OF  BUSINESS  DEPRESSIONS  333 

silk  manufactures.  Again,  we  know  that  Liverpool  once 
had  a  flourishing  watch-making  industry,  which  was  ruined 
by  free  importation  of  watches  into  England,  and  the  work- 
men who  had  spent  a  life-time  in  their  trade  clung  on  with 
constantly  lowering  wages  until  they  died  in  poverty.  And, 
on  the  other  hand,  we  see  in  America  a  great  and  flourish- 
ing industry  making  American  watches  because  they  are 
protected  from  the  cheap  workmanship  of  Switzerland  and 
Germany. 

A  great  many  economists  fail  to  see  the  connection  be- 
tween protective  tariff  and  prosperity.  They  claim  that 
tariff  benefits  monopoly  only  and  holds  up  the  price  to  the 
consumer,  but  the  practical  business  man  knows  that  the 
opposite  is  the  case.  The  trusts  and  monopolies  invariably 
want  low  tariff.  That  is  proven  by  the  activities  for  low 
duties  on  the  part  of  such  so-called  monopolies  as  the  Sugar 
Trust,  the  Leather  Trust,  the  Woolen  Trust,  etc.  These 
corporations  have  found  out  in  their  business  experience 
that  the  consumer  will  pay  only  to  a  certain  amount  for  a 
commodity,  and  above  that  consumption  falls  off.  There- 
fore, in  order  to  make  huge  profits,  the  trust  must  devise 
means  of  buying  cheaper  and  they,  therefore,  favor  a  low 
tariff  so  that  they  can  be  in  a  position  to  tell  the  American 
farmer  that  if  he  does  not  accept  their  price  for  his  product 
they  will  import  the  product.  It  is  well  known  that  these 
so-called  trusts  have  banking  facilities,  shipping  connec- 
tions, etc.,  to  control  90  per  cent  of  all  the  imports  in  their 
particular  line.  How  could  the  ordinary  independent  busi- 
ness man  import  these  commodities  with  his  obvious  lack  of 
facilities  to  do  so?  Political  agitators  have  given  the  un- 
posted American  public  a  wrong  idea  of  this  question. 
When  it  is  admitted  tint  we  need  higher  tariff  both  for 
revenue,  which  must  be  raised  by  some  kind  of  taxation, 
and  for  protection  of  our  labor — as  long  as  our  people  have 
a  higher  living  standard  than  most  foreign  countries — 
then  the  only  argument  against  the  protective  policy  is  that 
it  increases  the  cost  of  living,  and  that  is  true  only  in  a  very 


334  HISTORY   OF   BUSINESS   DEPRESSIONS 

slight  degree,  if  at  all.  The  cost  of  living  is  secondary,  any- 
how, to  steady  work  and  good  wages  and  prosperous  busi- 
ness conditions.  What  do  we  gain  by  trying  to  cut  the  cost 
of  living  a  little  and  destroy  or  cripple  our  industries?  We 
are  driving  along  the  wrong  line.  If  we  want  to  cut  the 
cost  of  living,  we  cannot  do  it  by  opening  our  markets  to 
cheap  labor  and  undermining  our  prosperity,  but  we  can 
do  it  by  enacting  laws  against  the  profiteer,  by  keeping  too 
many  middle  men  from  handling  our  necessities  of  life,  and 
by  prohibiting  speculation  in  such  necessities. 

Every  wise  importer  should  realize  that  there  is  nothing 
to  be  gained  by  low  duties  on  articles  that  can  be  produced 
here.  He  soon  finds  that  he  cannot  do  business  if  the  buy- 
ing power  of  the  American  public  is  destroyed.  How  can  he 
import  if  there  is  no  demand  and  if  our  people  are  out  of 
employment  and  our  business  depressed?  It  stands  to 
reason  that  the  importer  will  suffer  along  with  the  rest  of 
us.  He  should  realize  that  in  most  cases  high  duties  are  no 
insurmountable  drawback  if  conditions  are  favorable 
through  good  times  and  a  resulting  demand.  As  has  been 
said  before,  figures  do  not  lie,  and  statistics  indisputably 
show  that  there  have  been  more  failures  among  importers 
during  periods  of  low  tariff  than  of  high  tariff.  Admittedly, 
we  cannot  sell  to  foreign  countries  unless  we  buy  from 
them,  but  where  nature  has  given  us  the  material  and  con- 
ditions to  build  an  industry  we  should  protect  that  indus- 
try, and  we  can  still  buy  from  foreign  countries  unnum- 
bered commodities  that  nature  has  so  ordained  cannot  be 
produced  in  this  country.  We  can  always  sell  to  the  for- 
eigner our  food  products,  iron  and  steel,  cotton,  implements, 
automobiles,  etc.,  and  in  return  buy  such  articles  as  are  al- 
ready enumerated.  That  is  letting  things  take  their  natural 
course;  it  is  going  along  the  lines  of  least  resistance.  We 
cannot  think  of  any  policy  other  than  a  protective  tariff 
as  long  as  our  American  labor  must  compete  with  Hindu  or 
Chinese  labor,  for  instance,  which  works  for  seven  or  eight 
cents  a  day.  People  have  an  idea  that  distance  itself  is  a 


HISTORY  OF  BUSINESS   DEPRESSIONS  335 

protection  against  foreign  competition,  but  the  rate  across 
the  Pacific  Ocean  is  less  than  the  freight  rate  from  San 
Francisco  to  Denver.  The  rate  on  potatoes  from  Hastings, 
Fla.,  to  New  York  is  85  cents  per  hundred,  while  from 
Denmark  to  New  York  it  is  35  cents  per  hundred. 

Whatever  may  be  said  pro  and  con  on  the  tariff  question 
by  advocates  of  protection  and  free  trade,  it  is  admitted  on 
all  sides  that  the  constant  tinkering  has  been  the  cause  of 
unsettled  business  conditions  during  many  periods.  Who- 
ever may  not  be  willing  to  agree  that  the  different  tariff 
laws  have  been  the  direct  cause  of  depressions  will  have  to 
admit  that  the  lack  of  a  definite  and  settled  policy  has  many 
times  retarded  the  progress  of  business.  The  act  of  1897, 
which  lasted  for  twelve  year,  until  1909,  is  the  longest 
period  in  our  history  that  we  have  let  the  tariff  alone.  The 
next  rival  to  this  period  was  that  of  1846,  when  the  tariff 
remained  undisturbed  for  eleven  years. 

Tom  Reed  said  about  these  word:  "Some  day  will  come 
the  brotherhood  of  man  and  we  will  all  speak  the  same  lan- 
guage; workmen  around  the  world  will  be  paid  the  same 
wage  with  the  same  money ;  when  there  are  no  nations,  but 
we  are  all  one  people.  Then  free  trade  will  be  both  practical 
and  glorious,  but  not  before." 

We  need  nothing  more  than  to  look  back  to  our  periods 
of  depression  under  low  tariffs  and  find  armies  of  poor  and 
dependent  workmen  who  became  transformed  into  indus- 
trious and  enterprising  citizens  under  the  stimulous  of  pro- 
tection to  our  domestic  industries. 


CHAPTER  XXXIII 
DEPRESSIONS  AND  FOREIGN  TRADE 

Business  revivals  following  depression  have  often  been 
prompted  by  a  keen  foreign  demand  for  our  goods.  Such 
was  notably  the  case  in  1848,  in  1879,  in  1885,  in  1891,  in 
1897,  and  1915.  We  now  have  a  larger  foreign  trade  than 
ever,  most  of  which  we  are  going  to  hold.  That  is  shown 
by  the  fact  that  the  Baldwin  Locomotive  Company  recently 
received  orders  to  the  amount  of  $16,000,000  from  the  Ar- 
gentine National  Railroads  in  competition  with  large  foreign 
concerns.  We  could  export  a  great  deal  more  if  the  finances 
of  foreign  countries  were  stable  and  the  exchange  rate  more 
favorable.  However,  economists  rightly  point  out  that  we 
are  capable  of  being  prosperous  by  trading  among  our- 
selves. Foreign  trade  is  not  absolutely  necessary  to  our 
national  welfare.  It  averages  only  5  per  cent  of  our  total 
business. 

In  colonial  days  the  exports  consisted  mainly  of  furs, 
cereals,  provisions,  lumber,  whale  oil,  tobacco,  indigo,  and 
naval  stores.  The  imports  were  manufactured  goods  and 
the  necessities  of  life. 

At  the  close  of  the  Seventeenth  Century  Great  Britain  had 
gained  the  commercial  leadership  of  the  world  and  her 
colonies  in  America  achieved  a  commercial  and  maritime 
success  even  more  notable  than  the  triumphs  of  the  mother 
country. 

Foreign  trade  of  the  original  colonies  was  carried  on  by 
chartered  companies  that  operated  the  ships  to  carry  both 
colonists  and  commerce.  The  progress  or  decline  of  our 
foreign  trade  was  largely  affected  by  regulations  promul- 
gated in  the  old  country,  such  as  bounties,  preferential 
duties,  drawbacks,  etc.  The  most  drastic  of  these  was  the 
Molasses  Act  of  1733,  which  depressed  the  important  trade 


HISTORY   OF  BUSINESS  DEPRESSIONS  337 

that  had  started  with  the  French,  Dutch,  Spanish  and 
Danish  colonies  in  the  West  Indies.  At  that  time  foreign 
trade  was  done  entirely  on  the  mercantile  theory,  the  prin- 
ciples of  which  were  that,  "Trade  must  be  so  conducted 
that  the  money  value  of  the  commodities  exported  from  the 
country  exceeds  the  money  cost  of  the  goods  imported,  so 
that  there  is  a  'favorable  balance  of  trade,'  with  a  steady 
flow  of  coin  or  bullion  into  the  country." 

Immediately  following  the  Revolution  our  foreign  trade 
had  to  be  reorganized.  The  greatest  chaos  and  disaster 
existed  after  the  war  which  made  it  doubly  hard  to  make 
headway  in  the  shipping  industry.  Great  Britain  had  put 
into  force  the  Navigation  Act.  British  subjects  were  for- 
bidden to  purchase  American  built  ships,  and  as  the  ceceding 
territory  was  treated  as  thirteen  separate  and  distinct 
states,  American  vessels  were  excluded  from  British  ports 
unless  their  cargo  consisted  of  the  products  of  the  particular 
state  where  her  owners  resided.  Under  these  regulations 
American  merchants  forfeited  a  trade  worth  $3,500,000  a 
year.  America  had  a  big  trade  with  Jamaica  and  with  the 
Bahamas  which  was  now  ruined.  Separation  from  England 
brought  serious  depression  in  such  products  as  indigo,  naval 
stores  and  hemp,  most  of  which  were  exported.  Moreover, 
the  prohibitory  duties  of  the  Corn  Law  were  imposed  upon 
all  agricultural  products,  bringing  like  depression  to  all 
agricultural  industries.  Attempts  to  negotiate  more  favor- 
able commercial  treaties  with  Europe  so  as  to  relieve  the 
shipping  depression  failed  because,  as  Washington  said, 
"We  are  one  nation  today,  thirteen  tomorrow;  who  will 
treat  with  us  on  these  terms?" 

For  twenty  years  following  the  Revolution  American 
traders  had  to  take  the  risk  of  being  captured  by  privateers 
from  the  Barbary  States  or  by  warships  from  fighting  Euro- 
pean countries,  but  in  spite  of  severe  depressions  coming  at 
intervals  during  this  period  by  the  year  1815  the  United 
States  held  the  position  in  the  world's  trade  second  only  to 
Great  Britain. 


338 


HISTORY   OF   BUSINESS   DEPRESSIONS 


When  the  European  wars  were  raging  American  shipping 
was  prosperous.  In  1802  and  1803,  during  a  brief  period  of 
peace,  it  suffered  an  immediate  decline ;  when  the  wars  were 
renewed  prosperity  returned  for  a  time,  until  after  1807, 
when  Napoleon  Bonaparte,  refusing  to  recognize  that  there 
were  any  neutrals,  inflicted  his  "continental  policy"  upon 
the  commercial  world,  and  England  enforced  her  Orders 
in  Council  with  men-of-war.  Had  the  peace  proved  perma- 
nent there  would  have  been,  without  doubt,  a  further  de- 
cline in  American  commerce,  as  the  European  countries 
resumed .  their  former  commercial  relations.  With  the 
reopening  of  war,  however,  the  Americans  enjoyed  the  ad- 
vantages of  their  previous  position;  the  exports  of  1806 
and  1807  exceeded  a  hundred  millions  in  value,  and  marked 
a  height  which  exports  did  not  again  reach  for  nearly 
twenty  years. 


TOTAL  FOREIGN  TRADE  OF  THE 

Domestic 

Year  Exports 

1790     $19,666,000 

1791 18,500,000 

1792  _           19,000,000 

1793    24,000,000 

1794   26,500,000 

1795 39,500,000 

1796     40,764,000 

1797.  29,850,000 

1798 28,527,000 

1799 33,142,000 

1800 31,841,000 

1801  47,473,000 

1802 36,708,000 

1803 42,206,000 

1804    41,467,000 

1805 42,387,000 

1806 41,253,000 

1807 48,700,000 

1808 9,433,000 

1809 31,406,000 

1810     42,366,000 

1811 45,294,000 

1812 30,032,000 

1813 25,008,000 

1814 6,782,000 

1815 45,974,000 

1816 64,782,000 

1817 68,313,000 


UNITED  STATES 

Total 

Imports 

$  23,000,000 

29,200,000 

31,500,000 

31,100,000 

34,600,000 

69,756,000 

81,436,000 

75,379,000 

68,552,000 

79,069,000 

91,253,000 

111,364,000 

76,333,000 

64,666,000 

85,000,000 

120,600,000 

129,410,000 

138,500,000 

56,990,000 

59,400,000 

85,400,000 

53,400,000 

77,030,000 

22,005,000 

12,965,000 

113,041,000 

147,103,000 

99,250,000 


HISTORY  OF  BUSINESS   DEPRESSIONS  339 

Imports  dropped  from  a  value  of  $121,750,000  in  1818 
to  $87,125,000  in  the  following  year,  and  exports  of  domes- 
tic products  fell  from  $73,854,000  to  $50,977,000  during  the 
trade  year. 

VALUE  OF  EXPORTS  AND  IMPORTS  OF  THE  UNITED 
STATES,  1819  TO  1830 

Exports,  domes- 
Year  tic  products  Imports 

1819 $50,977,000  $87,125,000 

1822 49,874,000  83,242,000 

1825 66,945,000  96,340,000 

1827 58,922,000  88,509,000 

1830 59,462,000  70,877,000 

An  idea  of  the  effect  of  the  depression  of  1809  on  foreign 
trade  may  be  gained  from  the  following  story  told  by  an 
English  trader  who  visited  New  York  during  this  ruinous 
regime : 

"The  port,  indeed,  was  full  of  shipping;  but  they  were 
dismantled  and  laid  up.  Their  decks  were  cleared,  their 
hatches  fastened  down,  and  scarcely  a  sailor  was  to  be 
found  on  board.  Not  a  box,  bale,  cask,  barrel,  or  package 
was  to  be  seen  upon  the  wharves.  Many  of  the  counting 
houses  were  shut  up,  or  advertised  to  be  let;  and  the  few 
solitary  merchants,  clerks,  porters,  and  laborers  that  were 
to  be  seen  were  walking  about  with  their  hands  in  their 
pockets.  Instead  of  sixty  or  a  hundred  carts  that  used  to 
stand  in  the  street  for  hire,  scarcely  a  dozen  appeared,  and 
they  were  unemployed ;  a  few  coasting  sloops,  and  schooners, 
which  were  clearing  out  for  some  of  the  ports  in  the  United 
States,  were  all  that  remained  of  that  immense  business 
which  was  carried  on  a  few  months  before.  .  .  .  The  streets 
near  the  waterside  were  almost  deserted,  the  grass  had  be- 
gun to  grow  upon  the  wharves,  and  the  minds  of  the  people 
were  tortured  by  the  vague  and  idle  rumors  that  were  set 
afloat  upon  the  arrival  of  every  letter  from  England  or 
from  the  seat  of  government." 

When  the  embargo  gave  way  our  foreign  trade  quickly 
recovered,  shippers  taking  advantage  of  their  opportunity, 
and  in  one  year  we  had  recovered  91.5  per  cent  of  our  trade. 

We  surpassed  in  ship  building  in  the  early  days  because 


340  HISTORY   OF  BUSINESS   DEPRESSIONS 

of  the  abundance  of  oak  and  hard  pine,  and  the  best  ship- 
wrights in  the  world.  We  reached  the  height  of  our  prestige 
in  1810.  Following  that  came  a  long  period  of  normalcy 
until  1846,  when  we  passed  the  previous  high  water  mark, 
and  the  next  fifteen  years  were  very  prosperous  for  Ameri- 
can shipyards.  At  this  time  the  construction  of  a  schooner 
of  500  tons  cost  $37,500  in  the  United  States  and  $42,000 
in  England.  Today  the  reverse  obtains  and  probably  with 
a  greater  difference. 

The  advance  which  began  in  1831  and  ended  in  1837  car- 
ried the  foreign  trade  to  a  higher  level  than  it  had  reached 
during  the  abnormal  rise  of  the  years  1815  to  1818.  The 
exports  of  domestic  merchandise  rose  from  $59,462,000  in 
1830  to  nearly  $107,000,000  in  1836,  or  to  a  point  over 
$33,000,000  in  excess  of  the  previous  maximum  of  the  year 
1818. 

VALUE  OF  EXPORTS  AND  IMPORTS  OF  THE  UNITED 
STATES,  1830  TO  1836 

Domestic 

Year  Exports  Imports 

1830 $  59,462,000  $  70,877,000 

1831 61,277,000  103,191,000 

1832 63,137,000  101,029,000 

1833 70,317,000  108,118,000 

1834 81,034,000  126,521,000 

1835 101,189,000  149,896,000 

1836 106,917,000  189,980,000 

According  to  figures  by  Conant,  in  1837,  "the  excessiye 
purchases  of  foreign  goods,  which  did  not  have  to  be  paid 
for  in  either  merchandise  or  bullion,  is  shown  by  the  fact 
that  the  imports  from  Europe  increased  from  $62,893,883 
for  the  year  ending  September  30,  1833,  to  $127,511,020  in 
1836,  and  even  the  imports  from  other  countries  increased 
from  $38,154,060  to  $49,068,134.  This  great  increase  in 
consumption  was  offset  only  partially  by  the  increase  in 
exports  of  American  merchandise  to  Europe,  which  rose 
from  $56,556,837  in  1833  to  $96,413,449  in  1836,  while  other 
exports  slightly  fell  off.  The  reaction  was  striking  after  the 
breaking  out  of  the  crisis.  Imports  fell  during  the  year  end- 
ing September  30,  1838,  to  $62,017,575,  while  exports  from 
the  United  States  to  Europe  fell  only  to  $79,849,768." 


HISTORY  OF  BUSINESS   DEPRESSIONS  341 

The  panic  of  1837  was  not  the  result  of  abnormal  foreign 
trade,  as  the  panic  of  1818-19  to  a  large  extent  had  been, 
but  when  the  business  reaction  came  a  setback  in  imports 
and  exports  occurred.  In  one  year  the  value  of  the  imports 
shrank  nearly  $49,000,000  and  that  of  the  exports  over 
$11,000,000. 

VALUE  OF  EXPORTS  AND  IMPORTS  OF  THE  UNITED 
STATES,  1836  TO  1846 

Domestic 
Year  Exports  Imports 

1836 $106,917,000  $189,980,000 

1837 95,564,000  140,989,000 

1840 113,896,000  107,142,000 

1845 99,300,000  117,255,000 

1846 102,142,000  121,692,000 

The  value  of  the  exports  of  merchandise  from  the  United 
States  for  the  fiscal  year  1847  was  $156,741,598,  an  in- 
crease of  more  than  40  per  cent  over  any  preceding  year; 
the  excess  of  exports  over  imports  was  $34,317,249,  a  bal- 
ance never  again  attained  until  1876. 

The  depression  of  1857  gave  our  shipping  a  serious  set- 
back. In  1845  it  had  become  apparent  that  we  would  lose 
our  foreign  trade  carried  in  American  bottoms  unless  we- 
quickly  turned  from  the  sailing  craft  to  the  new  steam  ves- 
sel. Congress  came  to  the  aid  of  shipping  with  a  subsidy. 
The  Pacific  Mail  plying  around  Cape  Horn  to  California 
was  subsidized  for  $250,000  a  year  and  the  Collins  line  from 
New  York  to  Liverpool  for  $858,000.  Other  important  lines 
received  large  subsidies.  With  the  reaction  of  this  year  and 
sudden  reduction  of  revenue,  Congress  proceeded  to  limit 
all  subsidies  to  the  amount  of  sea  and  land  postage  on  the 
mails  actually  carried.  Our  shipping  from  that  time  gradu- 
ally fell  until  in  a  few  decades  the  American  flag  was  prac- 
tically off  the  seas.  The  decline  of  American  shipping  was 
marked  by  the  depression  of  1857. 

Our  foreign  trade  suffered  severely  during  the  Civil  War. 
While  the  South  did  not  win  the  war,  she  put  the  nation  out 


342  HISTORY  OF   BUSINESS   DEPRESSIONS 

of  the  shipping  business  until  its  revival  in  the  recent  world 
conflict.  We  came  out  of  the  Civil  War  with  about  a  million 
tons  of  shipping  less  than  we  had  at  the  beginning,  and  by 
1900,  over  a  period  of  forty  years,  we  had  not  increased  our 
tonnage. 

The  increase  of  our  foreign  trade  helped  to  bridge  over  the 
short  depression  of  1878-79.  Our  large  exports  as  a  result 
of  crop  failure  in  Europe  in  1891  quickly  pulled  us  out  of  the 
depression  of  1890.  In  the  six  months  ending  June  30,  1893, 
the  balance  of  trade  against  the  United  States  was  $68,- 
800,000. 

In  the  depression  of  1893  on  up  to  and  including  1914  our 
own  shipping  was  little  affected  because  of  our  lack  of  ton- 
nage. In  previous  years,  from  the  time  of  the  founding  of 
the  Republic  until  after  the  panic  of  1873,  our  shipping  had 
been  an  important  factor  in  all  depressions,  because  we  were 
then  one  of  the  leading,  and  sometimes  the  leading,  shippers 
and  carriers  of  the  world. 

Our  foreign  trade  expanded  rapidly  from  the  good  times 
that  started  with  the  McKinley  administration  up  to  the 
depression  of  1907.  Exports  of  merchandise  in  the  fiscal 
year  1896  amounted  to  $882,606,938,  and  rose  by  1906  to 
$1,743,864,500.  Imports  of  merchandise  in  1896  were 
$779,724,674,  and  in  1906  they  rose  to  $1,226,562,466. 

In  1907  came  the  willingness  on  the  part  of  American 
business  to  sacrifice  goods  for  money,  and  in  a  few  months 
our  exports  exceeded  our  imports  two  to  one.  The  accom- 
panying table  will  show  how  the  quick  expansion  of  exports 
brought  gold  into  the  United  States : 

*FOREIGN    TRADE    MOVEMENT,    AUGUST    1    TO 
DECEMBER  31,  1907 

Imports  of  Exports  of  Excess  of 

Month                 Merchandise  Merchandise  Exports 

August $125,806,043  $127,270,447  $     1,464,404 

September    ___     106,365,180  135,318,342  28,953,162 

October 111,912,621  180,256,085  68,343,464 

November 110,942,916  204,474,217  93,531,301 

December 92,288,771  207,179,436  114,890,665 


"Table  by  Conant. 


HISTORY   OF  BUSINESS   DEPRESSIONS  343 

In  Europe  there  is  a  great  deal  of  agitation  at  this  time 
urging  the  cancellation  of  debts  among  nations.  Some  claim 
it  will  help  our  foreign  trade  if  we  cancel  the  foreign  obliga- 
tions owing  us.  One  British  writer  claims  that  Great  Britain 
will  not  demand  cancellation  of  the  debt,  but  that  America 
will  be  forced  to  take  the  step  voluntarily  in  order  to  retain 
her  foreign  trade.  It  is  a  certainty  that  no  American  admin- 
istration that  even  proposed  such  procedure  could  survive 
and  it  is  a  peculiarity  that  as  long  as  two-thirds  of  the  world 
was  in  debt  to  Great  Britain  no  proposal  of  that  kind  came 
from  her.  Yet  the  instant  she  became  a  debtor  nation  she 
starts  a  cry  for  cancellation.  The  world  in  time  will  pay  its 
debts.  This  is  not  the  first  time  we  have  heard  the  cry  of 
repudiation.  At  different  periods  since  the  beginning  of 
modern  times  word  has  gone  out  that  the  world  was  bank- 
rupt, and  yet,  with  few  exceptions,  in  the  case  of  smaller 
states,  every  nation  has  paid  its  debts. 

During  the  distress  in  Great  Britain  in  1816  Lord  Broug- 
ham said  in  urging  exports  to  this  country  that,  "Ultimately 
the  Americans  will  pay,  which  the  exhausted  state  of  the 
continent  renders  very  unlikely."  Yet  the  continent  paid. 

In  1920  we  again  had  a  merchant  marine,  rating  probably 
third,  and  the  shipping  situation  was  an  important  factor 
in  the  depression.  Two-thirds  of  our  steel  ships  and  all  the 
wooden  ships  we  had  built  during  the  emergency  were  laid 
up  and  thousands  of  seamen  that  had  been  trained  to  operate 
them  were  out  of  employment.  While  world  shipping  was 
adversely  affected,  yet  there  was  considerable  cargo,  but 
foreign  shipping  took  it  away  from  us  because  of  lower 
operating  costs  and  consequently  lower  rates.  It  was  early 
foreseen  that  if  we  could  carry  American  products  in  Ameri- 
can ships  event  at  a  loss,  it  would,  in  the  final  analysis,  be 
a  gain,  because  it  would  give  employment  to  our  seamen  and 
operators  and  help  us  out  of  the  depression. 

The  balance  of  trade  between  nations  is  sometimes  mis- 
understood. In  the  long  run  the  exports  of  merchandise 
from  any  country  must  equal  its  imports.  Any  difference 


344  HISTORY  OF  BUSINESS  DEPRESSIONS 

or  so-called  balance  in  any  year  must  be  offset  by  invisible 
items,  such  as  securities  and  credit  extensions  between 
banks.  We  like  to  boast  of  greater  exports  than  imports, 
showing  the  balance  of  trade  in  our  favor.  An  influx  of 
gold  must  naturally  follow  to  meet  these  trade  balances.  We 
were  very  proud  when,  in  the  eighties,  we  began  exporting 
more  than  we  imported  for  the  first  time  in  our  history,  and 
again  during  the  war  period  when  we  passed  from  debtor  to 
creditor  nation.  Yet,  in  the  early  days,  when  we  imported 
far  more  than  we  exported,  we  prospered  tremendously  be- 
cause of  the  fact  that  the  money  made  by  European  nations 
from  their  exports  to  us  was  handled  by  their  agents,  de- 
posited on  this  side  and  loaned  out  to  us  for  the  development 
of  our  new  country.  It  was  this  capital,  that  we  did  not 
have  ourselves,  that  largely  helped  to  develop  America.  Up 
until  the  world  war  great  shipments  of  American  securi- 
ties were  held  in  Europe,  most  of  which  drifted  back  to  our 
hands  through  the  stress  of  war  necessities.  Taking  the 
second  phase  of  it — the  imports  of  gold  necessary  to  pay  the 
trade  balance  in  our  favor — we  cannot  help  but  reflect  on 
the  Biblical  quotation,  "What  profiteth  it  a  man  if  he  gain 
the  whole  world  and  lose  his  own  soul?"  The  trade  balance 
during  the  war  period  was  so  enormously  in  our  favor  and 
the  influx  of  gold  so  tremendous  that  it  was  a  severe  handi- 
cap to  us.  It  was  one  of  the  primary  causes  of  the  depres- 
sion. We  had  so  much  gold  that  the  exchange  rate  worked 
decidedly  against  us.  Dollars  became  so  high  that  other 
nations  could  not  afford  to  buy  them  in  order  to  pay  us  in 
our  own  money,  which  we  required.  In  1920  had  we  been 
good  gamblers,  and  luck  proved  to  be  with  us,  we  could  have 
made  much  money  by  selling  our  surplus  to  European  coun- 
tries that  needed  it,  taking  their  money,  backed  by  bonds, 
and  waiting  for  it  to  rise  to  normal  value.  Some  advocated 
this  procedure  on  the  grounds  that  we  had  better  havts 
European  money  than  rotten  products.  In  one  case  this  was 
done  very  advantageously — in  the  case  of  the  rice  crop.  In 
1920  we  had  produced  the  largest  crop  ever  grown.  The 


HISTORY  OF  BUSINESS   DEPRESSIONS  345 

price  was  badly  depressed  and  the  producers  suffered  great 
loss.  The  Louisiana  State  Rice  Milling  Company,  under 
the  direction  of  Mr.  Frank  Godchaux,  arranged  to  export 
large  quantities  to  Europe,  his  company  taking  their  securi- 
ties in  payment.  Thus  the  surplus  rice  was  exported  and 
the  balance  left  on  hand  brought  very  satisfactory  prices, 
so  that  in  a  few  months  the  trade  was  again  in  favorable 
condition.  Thus  it  can  be  seen  that  there  are  many  phases 
to  trade  balances  between  nations,  and  it  is  a  fact  that  one 
nation  cannot  permanently  profit  at  the  expense  of  another. 
Temporary  advantage  may  be  gained,  but  a  depression  is 
bound  to  follow  until  the  other  nation  catches  up.  It  was 
thought  by  traders  in  the  old  days  that  when  we  bought 
from  foreign  countries  we  sent  just  so  much  money  out  of 
the  country,  and  that  when  we  exported  we  enriched  our- 
selves and  pauperized  the  purchasing  country.  That  has 
proven  to  be  a  fallacy  because,  although  we  might  export  a 
great  deal  to  one  certain  country  from  whom  we  buy  but 
little  in  return,  yet  that  same  country  may,  in  turn,  have 
large  exports  to  another  country  in  a  different  part  of  the 
world  from  Whom  she  also  in  turn  buys  but  little,  and  so 
goes  the  cycle  of  trade  until  it  evens  itself  up,  as  it  is  neces- 
sary to  do. 

Another  phase  affecting  America's  trade  balances  is  the 
money  spent  by  our  tourists.  For  a  period  before  the  war 
our  trade  balance  in  exports  as  against  imports  showed 
largely  in  our  favor,  yet  an  important  item  was  ordinarily 
overlooked,  and  that  was  the  money  taken  abroad  and  spent 
by  our  tourists.  For  a  period  of  years  our  tourists  spent 
abroad  sufficient  to  make  up  the  difference  shown  by  the 
trade  balance  in  our  favor,  so  that  after  all  the  influx  of 
wealth  was  negligible.  In  fact,  during  the  depression  of 
1907  terrific  cries  went  up  that  the  money  stringency  was 
largely  due  to  the  enormous  amounts  of  American  money 
being  spent  in  Europe  by  wealthy  tourists.  Since  our  pros- 
perity, starting  in  1897,  this  complaint  has  been  made  in 
every  period  of  financial  crisis  or  stringency.  A  further 


346  HISTORY  OF  BUSINESS  DEPRESSIONS 

offset  in  previous  years  against  our  favorable  trade  balance, 
and  which  was  not  shown  in  the  figures  was  the  payments 
to  foreign  nations  for  carrying  our  products.  Had  these 
payments  entered  into  the  figures  in  many  cases  a  different 
tale  would  have  been  told.  We  never  had  a  real  trade  bal- 
ance in  every  way  until  the  last  years  of  the  war  and  the 
prosperity  immediately  following  the  war,  when  we  car- 
ried cargo  in  our  own  bottoms,  paying  ourselves  for  the 
services,  when  we  sent  little  or  no  money  abroad  in  interest 
payments  on  investments,  and  when  the  tourists'  trade  was 
stopped  and  little  money  went  for  that  purpose.  Then, 
really  for  the  first  time  in  history,  did  we  have  an  actual 
trade  balance,  and  that  was  offset  by  the  loans  we  made  to 
Europe  which  she  still  owes  us,  including  the  interest. 

International  traders  set  up  the  argument  in  every  period 
of  depression  that  we  must  increase  our  foreign  trade  in 
order  to  relieve  the  stringent  conditions.  They  also  are 
becoming  more  insistent  that  we  must  import  in  order  to 
export.  In  the  years  of  depressions  our  imports  have  in- 
variably fallen  because  of  our  lack  of  buying  power;  for 
instance,  in  1858  following  the  panic  of  the  year  previous, 
our  exports  for  the  first  time  exceeded  the  imports,  unques- 
tionably on  account  of  our  lack  of  buying  power.  This  hap- 
pened again  in  1874,  following  the  year  of  the  panic  pre- 
ceding, and  in  1893  caused  by  the  panic  of  that  year.  In 
giving  these  figures  it  will  be  remembered  that  during  the 
entire  period  we  were  a  debtor  nation.  In  other  words,  we 
normally  imported  more  than  we  exported.  In  recent  years, 
however,  we  have  become  a  creditor  nation,  exporting 
to  a  larger  extent  than  importing.  No  depressions  have 
been  brought  about  by  the  falling  off  of  our  foreign  trade  in 
recent  years,  although  it  was  a  contributing  factor  to  the 
depression  of  1820.  Japan's  panic  of  1920  was  brought 
about  principally  by  the  stoppage  of  foreign  demand  for 
her  commodities.  That  panic  which  smashed  prices  of 
Oriental  goods  caused  many  failures  and  great  distress 
among  American  importers  on  the  Pacific  Coast  and  in  New 


HISTORY  OF  BUSINESS   DEPRESSIONS  347 

York,  and  was  the  forerunner  of  our  industrial  depres- 
sion which  followed. 

In  the  depression  of  1857  imports  fell  off  $85,087,688  in 
twelve  months.  In  1861  they  fell  off  $100,000,000,  although 
this  was  an  abnormal  condition  because  of  the  outbreak  of 
the  Civil  War.  In  the  1873  depression  they  declined  $75,- 
000,000  in  twelve  months;  the  1884  depression  recorded  a 
$90,000,000  decline ;  in  the  1893  depression,  when  our  com- 
merce began  to  assume  larger  proportions,  imports  declined 
$212,000,000  in  one  year.  In  the  1907  depression  they  fell 
off  $240,000,000  in  the  following  year,  1908.  In  1915,  the 
year  following  the  outbreak  of  the  World  War,  they  drop- 
ped $219,000,000,  and  in  1921,  while  full  statistics  are  not 
yet  available,  it  is  common  knowledge  that  there  was  a 
tremendous  falling  off.  All  of  this  goes  to  show  that  in  times 
when  there  is  a  lack  of  buying  power  in  this  country  the  lot 
of  the  importer  is  hard,  so  there  is  nothing  to  gain  for  him, 
in  the  long  run,  by  a  desire  to  import  foreign  goods  to  such 
an  extent  that  the  prosperity  of  our  people  is  undermined. 


CHAPTER  XXXIV 
THE  RAILROADS  IN  TIMES  OF  DEPRESSION 

The  history  of  American  railroads  has  been  closely  en- 
twined with  the  history  of  depressions.  The  panic  of  1837 
was  helped  in  the  making  by  building  railroads  beyond  the 
needs  of  the  country  and  taking  capital  away  from  enter- 
prises which  were  necessary  to  support  railroad  develop- 
ment. The  modern  industrial  corporation  came  into  exist- 
ence about  the  time  railroad  building  started  in  the  year 
1830.  As  we  saw  our  ocean  shipping  decline  for  various 
reasons,  the  money  was  taken  from  that  industry  and  put 
into  the  development  of  the  West,  in  which  the  railroads 
were  the  most  important  factors. 

The  London  Financial  Times  some  years  ago  said  that 
were  it  not  for  the  railroads  "many  of  the  richest  agricul- 
tural states  in  the  Union  might  still  have  been  in  the  pos- 
session of  the  buffalo  and  the  red  Indian." 

We  have  now  had  one  hundred  years  of  railroad  history, 
which  is  divided  into  three  periods ;  the  first,  the  pioneer  or 
experimental  stage,  the  years  from  1820  to  1850;  the  sec- 
ond period  marked  the  development  of  the  trunk  lines,  in 
the  years  from  1850  to  1890,  and  the  third  a  period  of  con- 
solidation into  vast  systems,  from  1890  to  the  present  time. 
Railroad  building  started  as  a  means  of  solving  transporta- 
tion problems,  and  in  the  early  years  they  were  given  State 
aid  to  a  large  extent.  The  year  1837,  however,  with  the 
panic  that  came  at  the  time,  brought  an  end  to  state  aid,  and 
the  works  that  had  been  created  with  such  anticipation  on 
the  part  of  the  states  were  sold  by  them  to  private  cor- 
porations. 

By  that  year  the  different  states  had  appropriated  $6,618,- 
868  for  helping  to  build  railroads,  although  at  the  same  time 
$42,871,084  had  been  granted  for  building  canals. 


HISTORY   OF  BUSINESS   DEPRESSIONS  349 

These  public  improvements  to  an  excessive  extent,  so  it 
was  judged,  helped  to  bring  along  the  panic  of  that  year. 
Thereafter  the  states  withdrew  more  and  more  from  active 
participation  in  railroad  construction  and  it  became  in  this 
country  a  distinctly  private  enterprise,  unlike  most  of  the 
European  countries  where  there  are  still  many  state-owned 
railroads.  After  that  year  both  state  and  national  govern- 
ments confined  their  encouragement  of  railroad  construc- 
tion to  land-grants  and  bonuses  in  "the  form  of  bond  issues. 
In  these  subsidies  to  the  railways  Congress  made  in  all 
seventy-nine  grants,  amounting  to  nearly  200,000,000  acres 
of  public  domain.  This  aggregate  was  subsequently  re- 
duced to  158,286,627  acres,  of  which  more  than  108,000,000 
were  actually  patented. 

The  intention  was  to  occupy  and  possess  the  new  lands  in 
advance  of  settlement  and  secure  the  strategic  places  that 
would  mean  control  and  power  over  shipments  and  markets 
later  on.  The  effect  of  this  premature  and,  in  many  in- 
stances, needless  construction  was  shown  in  1873,  as  was 
also  the  case  in  1893,  by  the  wrecking  of  many  lines  and 
the  plunging  of  others  into  receiverships. 

Such  speculation  had  resulted  as  a  consequence  of  the  land 
subsidies  and  of  the  promotion  that  went  on  that  each  com- 
munity wanted  a  railroad  at  any  price.  "The  railway  mile- 
age built  in  the  United  States  in  1856  was  3,642  miles,  and 
the  construction  for  the  nine  years  ending  with  1857  was 
21,000  miles.  This  construction,  forming  seven-ninths  of 
the  entire  mileage  of  the  country,  had  absorbed  $700,000,- 
000,  largely  in  foreign  capital." 

Commodore  Vanderbilt,  who  founded  the  great  Vander- 
bilt  fortune,  made  much  money  out  of  railroads,  and  was 
mixed  up  in  several  of  our  early  panics.  As  wise  and  far- 
seeing  a  man  as  he  was  it  is  a  peculiar  coincidence  that  about 
the  time  of  the  1837  depression,  when  the  few  railstocks 
could  be  bought  for  almost  nothing,  the  Commodore  re- 
marked :  "I'm  a  steamboat  man,  a  competitor  of  these  steam 
contrivances  that  you  tell  us  will  run  on  dry  land.  Go  ahead. 


350  HISTORY  OF  BUSINESS   DEPRESSIONS 

I  wish  you  well,  but  I  never  shall  have  anything  to  do  with 
'em." 

In  1857  important  railroads  reaching  into  undeveloped 
sections  of  the  West  went  into  bankruptcy,  among  them  the 
Illinois  Central,  the  New  York  and  Erie,  and  the  Michigan 
Central.  The  railroad  statistics  for  the  period  preceding 
1857  are  interesting: 

•    English  Cost  in  Cost  per 

Miles  Dollars              Mile 

"United   States    (1856)  ___  24,195  846,825,000  $  35,000 

Great  Britain    (1855)  ___     8,297  1,487,916,420        179,000 

France                 (1856)—     4,038  616,118,995         152,000 

Germany             (1855)  ___     3,213  228,000,000           71,000 

Prussia                (1855)  ___     1,290  145,000,000           63,000 

Belgium              (1855)—     1,005  98,500,000          30,000 

Can  we  believe  our  eyes  today?  It  is  little  wonder  that 
our  people  went  wild.  What  man  could  have  withstood 
temptation  under  such  alluring  conditions?  Nearly  three- 
fourths  of  the  railroads  defaulted  in  their  interest  and  other 
payments  and  went  into  the  hands  of  receivers.  Some  of 
the  best  railroad  stocks  declined  to  three  to  five  dollars  a 
share,  including  Michigan  Southern  and  Harlem. 

A  thousand  shares  of  the  Illinois  Central  stock,  sold  to 
wind  up  an  estate,  appraised  at  $800,000  before  the  panic, 
went  at  auction  for  $50,000.  The  New  York  Herald  that 
year  blamed  the  banks  for  locking  up  $15,000,000  in  rail- 
road securities  which  were  not  worth  forty  cents  on  the 
dollar. 

In  1860  only  three  of  our  present  great  systems  were  in 
existence  and  prominent,  namely,  New  York  Central,  Illinois 
Central,  and  Delaware,  Lackawanna  &  Western. 

In  times  of  money  stringency,  crop  failures,  and  business 
depressions,  rail  bonds  became  a  terrible  burden  to  the 
people.  In  the  late  sixties  the  question  of  transportation 
rates,  elevator  charges,  etc.,  began  to  be  agitated  and  out  of 
this  came  an  organization  known  as  the  "Patrons  of  Hus- 


*Figures  by  Hyndman. 


HISTORY  OF  BUSINESS   DEPRESSIONS  351 

bandry,"  which  in  those  early  days  undertook  to  build  and 
control  elevators  and  other  commercial  enterprises  where  it 
was  claimed  abuses  had  crept  in  from  the  operation  of  the 
railroads.  The  railroads  were  run  recklessly,  with  a  short- 
sighted point  of  view,  and  a  great  many  favors  were  given 
to  shippers  as  compared  with  the  farmers  and  producers. 

Jay  Gould  testified  in  1872  that  "the  Erie  Railroad  had 
four  states  to  look  after,  and  it  switched  its  politics  to  cir- 
cumstances. In  1868  more  than  one  million  dollars  was 
spent  by  the  Erie  Railroad  for  'extra  and  legal  services,'  to 
control  elections  and  to  influence  legislation." 

In  1873  railroads  were  again  involved  and  the  principal 
causes  of  the  panic  was  over-speculation  in  railroad  securi- 
ties. New  York  banks  previous  to  that  time  had  made  un- 
warrantable advances  to  the  railroads  and  were  forced  to 
close  their  doors.  The  New  Haven  and  Willimantic  Rail- 
road pulled  down  the  Brooklyn  Trust  Company;  the  Mis- 
souri, Kansas  &  Texas  took  with  it  the  Mercantile  Security 
Company.  The  Canada  Southern  bankrupted  Kenyon,  Cox 
&  Co.  The  Vanderbilt  roads  involved  the  firm  of  Fisk  & 
Hatch,  and  the  Northern  Pacific  bankrupted  Jay  Cooke  & 
Co.,  the  failure  of  the  latter  being  the  general  signal  for 
collapse.  By  the  close  of  1872  it  had  dawned  upon  investors 
that  railway  construction  was  being  overdone.  Lowering 
prices  threatened  a  curtailment  of  agricultural  production 
and  diminished  the  prospect  of  freight  receipts.  The  high 
cost  of  operation,  at  prices  and  wages  then  prevailing,  com- 
bined with  unsettled  conditions  in  Europe,  checked  the  flow 
of  capital  westward.  Funds  could  not  be  obtained  for  the 
fulfillment  of  contracts,  and  construction  was  brought  to 
an  abrupt  stop. 

By  1873  a  fairly  complete  network  of  railroads  had  been 
built  from  the  Atlantic  Seaboard  to  the  Missouri  River,  with 
some  extensions  beyond,  one  of  which  reached  the  Pacific 
Ocean,  all  built  by  capital  drawn  from  Europe  or  the  East- 
ern States,  by  the  offer  of  exceptional  rates  of  interest.  In 
some  cases  the  promoters  had  invested  nothing  themselves 


352  HISTORY  OF   BUSINESS   DEPRESSIONS 

beyond  the  incidental  expenses  of  organizing  a  company.  All 
these  roads  were  mortgaged  for  their  full  cost.  In  this 
depression  the  new  roads  were  affected  by  a  panic  that  swept 
Europe  and  were  unable  to  market  their  securities  in  those 
financial  centers.  There  was  universal  suspension  of  work 
on  new  roads.  It  threw  tens  of  thousands  of  men  out  of 
work.  During  the  three  years  following  the  crisis  of  1873 
railroads  defaulted  bonds  in  the  amount  of  $789,367,655. 

In  1872  a  series  of  widespread  strikes  occurred  among  the 
railroads,  but  the  strikers  were  finally  beaten  by  the  depres- 
sion which  came  on  and  their  union  was  disorganized  and 
broken  up. 

Even  the  better  established  roads  in  the  most  populous 
sections  of  the  country  suffered  reverses  in  this  depression, 
particularly  because  of  competition.  For  instance,  at  that 
time  five  trunk  line  railroads  were  competing  for  the  trade 
from  Chicago  to  New  York.  These  were  the  Grand  Trunk, 
New  York  Central,  Erie,  Pennsylvania  and  the  Baltimore 
and  Ohio.  These  roads  had  not  received  the  large  land 
grants  that  had  been  given  to  new  roads  to  the  Pacific  Coast, 
and  it  was  up  to  them  to  finance  themselves  from  their  ac- 
tual carrying  trade.  This  was  the  cause  of  too  much  compe- 
tition for  the  traffic  in  those  times  so  that  some  of  these 
roads  naturally  could  not  weather  the  financial  crisis. 

The  crisis  of  1884  was  brought  about  by  the  too  rapid  and 
speculative  railroad  building  in  the  years  immediately  pre- 
ceding. Railroads  were  forced  to  curtail  construction  and 
practice  the  most  rigid  economy  in  management.  Coman 
attributes  the  crisis  of  1884  to  over-investment  in  railroads. 
"The  mileage  built  in  1882  and  1883  (18,314)  exceeded  the 
construction  of  1870  and  1871  by  5,000  miles.  In  1884  and 
1885  eighty-one  railway  corporations,  holding  19,000  miles 
of  track,  were  placed  under  receivership,  and  thirty-seven 
smaller  railroad  properties  were  sold  under  foreclosure. 
Owing  to  the  waging  of  rate  wars  between  competing  rail- 
road lines  during  the  two  years,  1884-85,  and  the  diminu- 
tion in  the  volume  of  traffic  because  of  the  depression  in 


HISTORY  OF  BUSINESS   DEPRESSIONS 


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354  HISTORY  OF  BUSINESS   DEPRESSIONS 

interior  trade  after  the  crisis  of  1884,  dividends  on  railroad 
stocks  were  reduced  and  in  many  cases  passed." 

The  period  of  consolidation  into  great  systems  had  gotten 
fairly  underway  in  the  early  nineties  when  the  depressions 
of  1890  and  1893  came  along.  Most  of  the  roads  survived 
the  short  depression  of  1890,  but  at  that  time  they  were  face 
to  face  with  the  fact  that  serious  difficulties  awaited  them. 
Public  agitation  had  taken  deep  root  against  stock-jobbing 
and  downright  crookedness  in  railroad  promotion  schemes 
and  finances.  State  legislatures  began  to  assume  an  antago- 
nistic attitude. 

In  the  year  1891  twenty-one  railroads,  totaling  more  than 
3,000  miles,  with  a  capitalization  of  $186,000,000,  were  sold 
under  the  hammer. 

Railroad  building  was  not  so  marked  a  feature  of  the 
years  preceding  the  panic  of  1893  as  of  earlier  panics,  but 
there  was  a  great  demand  for  capital  for  equipping  street 
railways  with  new  power,  and  the  railways,  as  usual,  were 
among  the  first  to  feel  the  effects  of  slackening  industry. 
The  New  York  Sun  printed  an  article  in  1895  reading :  "A 
list  of  dividends  paid  in  1893  which  had  ceased  to  be  paid  in 
1895  showed  a  total  of  $61,710,000  per  year.  Capitalizing 
this  at  5  per  cent  and  making  an  addition  for  smaller  con- 
cerns not  included  in  the  list,  'the  bad  investments  of  the 
public,  within  three  years,  came  fully  up  to  $1,500,000,000, 
and  are  likely  to  exceed  it.'  "  In  1893  the  Erie,  the  Philadel- 
phia and  Reading,  the  Northern  Pacific,  the  Atchison,  To- 
peka  and  Santa  Fe,  and  the  Union  Pacific  were  among  the 
great  railway  systems,  representing  hundreds  of  millions  of 
obligations,  which  passed  into  the  hands  of  receivers.  The 
total  capitalization  in  the  hands  of  receivers  was  about 
$2,500,000,000  or  one-fourth  of  the  railway  capital  of  the 
country.  The  earnings  of  railroads  and  the  dividends  paid 
to  stockholders  were  seriously  affected;  securities  fell  to 
one-half  and  even  one-quarter  their  former  value. 

In  the  difficulties  of  1893  railroad  stocks  fluctuated  wildljr 
as  shown  by  the  following  table : 


HISTORY  OF  BUSINESS   DEPRESSIONS  355 

RANGE  OF  LEADING  STOCKS  IN  1893 

* 

Railroads                                          Opening       Lowest  Closing 

Baltimore  and  Ohio 94  54  July  27  67 

New  York  Central  and  Hudson 109  92  July  26  98 

Pennsylvania 54  46  Dec.  18  48 

Atchison,  Topeka  &  Sante  Fe 34  9  Dec.   30  10 

Chicago,  Mil.  &  St.  Paul 77  46  July  26  56 

Illinois  Central 99  86  July  18  89 

Northern  Pacific  (pref.) 47  15  Aug.  16  18 

Union  Pacific 39  15  Aug.  26  18 

Chesapeake  and  Ohio 22  12  July  26  16 

Louisville  and  Nashville 72  39  Dec.  28  44 

The  year  1894  was  a  bad  year  for  the  railroads,  with  only 
1,899  miles  of  new  construction.  Railroad  earnings  fell  to 
$1,803  per  mile,  net,  the  lowest  figure  on  record.  During 
the  period  between  January  1st  and  October  31st  $1,200,- 
000,000  of  railroad  property  was  placed  in  the  hands  of 
receivers,  representing  one-third  of  the  railroads  in  the 
country.  Both  freight  and  passenger  traffic  fell  off,  earn- 
ings declined,  and  some  of  the  more  speculative  enterprises 
were  unable  to  cover  operating  expenses  and  meet  interest 
payments  on  their  bonded  debt.  Creditors  brought  suit, 
and  the  roads,  one  after  another,  were  given  over  to  re- 
ceivers. More  than  two  hundred  railway  companies,  rep- 
resenting fifty-six  thousand  miles  of  track  and  one-fourth 
of  the  railway  capital  of  the  country,  went  into  the  hands 
of  receivers  between  1892  and  1896. 

The  total  foreclosures  for  sixteen  years  showed  five  hun- 
dred companies,  with  more  than  50,000  miles  and  $3,000,- 
000,000  of  capital,  a  result  that  came  about  largely  through 
excessive  building  and  industrial  depression.  The  move- 
ment of  consolidation  was  retarded  by  the  depression  of 
1893  because  so  many  roads  were  in  the  hands  of  receivers, 
but  after  they  were  reorganized  the  movement  started 
again,  resulting  in  the  great  railroad  systems  of  today. 

In  the  depression  of  1903  Pennsylvania  stock  dropped 
from  127  5/8  to  110  3/4,  New  York  Central  fell  from  156 
to  112  5/8,  Chicago  and  Northwestern  declined  from 


Table  by  Lauck. 


356  HISTORY   OF  BUSINESS   DEPRESSIONS 

224  1/2  to  153,  Union  Pacific  from  103  5/8  to  65  3/4.  The 
depression  was  almost  entirely  a  railroad  depression.  The 
Hill  and  Harriman  factions  had  been  fighting  desperately. 
The  publicity  given  the  controversy  threatened  to  under- 
mine the  structure  of  railroad  credits.  In  this  depression, 
as  in  all  others  since  1893,  the  question  of  dividends  did 
not  enter.  Stocks  were  affected  purely  from  the  speculative 
standpoint. 

Preceding  the  1907  difficulties  railroads  had  been  sued  by 
several  states  and  the  bad  condition  of  their  inside  affairs 
had  been  given  detrimental  publicity  by  such  fights  as  the 
Harriman-Fish  contest  and  others. 

The  March,  1907,  flurry  was  a  forerunner  of  the  crash 
that  came  later.  An  account  of  the  railroad  fight  which 
caused  a  short  panic  in  that  month  is  interesting.  E.  H. 
Harriman  had  ousted  Stuyvesant  Fish,  who  was  head  of 
the  Illinois  Central,  and  Fish  had  sworn  revenge,  aligning 
with  him  the  Steel  Trust  group,  Morgan  and  Carnegie.  He 
also  had  Hill  and  James,  the  copper  king.  Harriman  had 
with  him  the  Rockefellers  and  the  Standard  Oil  group  and 
James  Stillman,  of  the  National  City  Bank.  Plans  were 
laid  ahead  to  embarrass  the  Rockefeller  banks  in  New  York 
so  they  could  not  back  Harriman  when  they  got  the  latter 
in  a  "jam"  with  money  at  their  disposal.  "Suddenly,  checks 
running  into  millions  were  presented  to  the  Standard  Oil 
banks  to  be  certified.  This  tied  up  the  money,  causing  it  to 
be  held  in  cash  reserve,  though  still  custodian  of  it.  This 
had  the  desired  result  of  running  money  up  to  10,  20,  or 
even  30  per  cent.  They  were  compelled  to  call  loans  to 
restore  cash  balances  while  holding  millions  of  idle  money, 
but  the  Rockefeller  resources  were  thrown  behind  it.  Their 
friends  were  warned  not  to  buy  stock  or  borrow  money  in 
anticipation  of  the  squeeze.  When  the  show-down  came  the 
Morgan  crowd  had  bought  over  600,000  shares  of  Harriman 
stocks,  but  Harriman  seemed  to  have  as  much  left  as  when 
they  started."  The  panic  of  October  followed,  due  largely 
to  the  evils  of  railroad  stock  speculation. 


HISTORY   OF  BUSINESS  DEPRESSIONS  357 

Previous  to  the  1907  depression  the  public  was  beginning 
to  hold  off  from  railroad  investments  because  of  the  hostility 
of  courts,  state  legislatures,  and  public  agitation  against 
them.  But  the  panic  gave  new  opportunity  for  the  acquisi- 
tion of  railway  properties,  and  Mr.  Harriman  utilized  it  by 
the  purchase  of  a  controlling  interest  in  the  Illinois  Central 
and  the  Erie  Railroad  and  secured  sufficient  stock  in  the 
New  York  Central,  the  Baltimore  and  Ohio  and  the  Missouri 
Pacific  to  entitle  him  to  representation  in  their  management. 

In  1907  railroad  stocks  suffered  severely.  The  Atlantic 
Coast  Line  went  from  133  3/8  to  58,  Baltimore  and  Ohio 
from  122  to  75  3/8,  The  Chicago,  Milwaukee  and  St.  Paul 
Common  from  157  1/2  to  93  1/2,  Illinois  Central  from  172 
to  116,  Missouri  Pacific  92  3/4  to  44  1/2,  Pennsylvania  from 
141  3/8  to  103  1/2,  Reading  139  1/8  to  70  1/2.  By  this 
period  railroad  expansion  had  largely  run  its  course.  Un- 
like the  earlier  depressions  the  earnings  were  not  seriously 
affected  and  no  important  lines  failed. 

*The  accompanying  table  will  show  the  fluctuations  of  the 
principal  railroad  stocks  during  the  panic  of  1907,  which 
will  indicate  losses  of  millions  of  dollars  in  these  securities : 

PANIC  OF  1907 


High 
1905-06 

Atchison,  Top.  &  Sante  Fe  Gen.  4s_  104% 
Baltimore  &  Ohio  1st  4s                 105% 

Low    Fall  from 
1907       High 

89%           15 
88               17% 
80               13 
85               29% 
113               19 
101               18% 
87               22 
58               24% 
82%           12% 
88               15% 
80               17 
49%           31% 
75               21% 
88               24% 
84%           17% 
91%             8% 

Baltimore  &  Southwestern  3%s  93 
Central  of  Georgia  Consol.  5s               114% 

Central  of  New  Jersey  General  5s__  132 
Chesapeake  &  Ohio  Consol.  5s       119% 

Chesapeake  &  Ohio  General  4%s  109 
Chicago  &  Alton  Ref'd.  3s                       82% 

Chi.  Burl.  &  Quincy,  111.  Div.  3%s__     95% 
Chi.  Rock  Island  &  Pacific  Gen.  4s_  103% 
Chi.  Rock  Island  &  Pacific  Ref'd  4s_     97 
Chi.  Rock  Isl.  &  Pac.  R.  R.  4s  2002     81% 
Colorado  &  Southern  1st  4s_     96% 

Delaware  &  Hudson  Conv.  4s     112% 

Erie  1st  Consol.  Prior  4s  __               102 

Illinois  Central  Gold  3%s  100 

*Table  by  Babson. 


358  HISTORY   OF   BUSINESS   DEPRESSIONS 

High        Low     Fall  from 
1905-06      1907          High 

Kan.  City,  Ft.  Scott  &  Mem.  Rf'd  4s     87%  61  26% 

Lake  Shore  Deb.  4s  1931 100  83  17 

Louisville  &  Nashville  Unified  4s__  104V*  92  12% 

Mo.,  Kan.  &  Tex.  1st  4s 103  89%  13% 

Mo.  Pacific  Coll.  5s 108%  89%  19 

New  York  Central  3%s 99%  85  14% 

Norfolk  &  Western  Div.  &  Gen.  4s__     99%  81%  18 

Northern  Pacific   1st   4s 106%  93%  12% 

Pennsylvania  Conv.  3%s  1915 101  83%  17% 

Reading  Co.  General  4s 102%  86%  16% 

Rio  Grande  Western  1st  4s 100  81  19 

St.  Louis  &  San  Francisco  Ref'd  4s_     88  66%  21% 

Southern  Pacific  Ref'd  4s 97%  82  15% 

Southern  Railway  Consol.  1st  5s___  119%  90  29% 

Union  Pacific  1st  4s 106%  92%  14% 

Wabash  1st  5s 119  99%  19% 

Wabash,  Pittsburgh  Term.  1st  4s__     90%  58  32% 

Western  Maryland  1st  4s 88%  59%  28% 

West  Shore  1st  4s 109  94  15 

The  principal  railroad  difficulties  in  the  depression  of 
1920  was  the  reorganization  of  the  Missouri,  Kansas  and 
Texas  and  the  Denver  and  Rio  Grande.  These  were  the  only 
important  lines  which  experienced  financial  difficulties  up 
to  December,  1921.  Just  as  railroad  speculation  entered  into 
our  early  panics,  the  railroad  stiuation  also  entered  the 
depression  of  1920.  When  increased  freight  and  passenger 
rates  were  authorized  the  public  immediately  showed  its 
resentment.  People  hurried  to  make  their  trips  and  return 
before  the  higher  rates  went  into  effect.  Those  who  were 
already  away  hastened  home.  Business  men  resolved  to 
cut  their  purchases  to  the  bone  on  account  of  the  exorbi- 
tant freight  rates.  Orders  were  cancelled  by  the  thousand. 
There  was  no  loud  protest  nor  agitation,  but  firm  and  silent 
resolve  on  the  part  of  the  people.  The  rates  were  unjust. 
In  a  very  few  months  the  railroad  managers  themselves  ad- 
mitted that  high  rates  certainly  did  not  stimulate  traffic. 
The  Bourbons  among  them  insisted  that  rates  be  main- 
tained because  the  resentment  would  soon  pass  and  the 
public  would  finally  accept  them  in  good  grace.  This  did 
not  come  to  pass,  however,  because  resentment  grew  with 
unabated  force  and  prolonged  the  depression. 


HISTORY  OF  BUSINESS  DEPRESSIONS  359 

The  railroad  situation  received  a  great  deal  of  blame 
for  the  troubles  of  1920-21.  The  roads  reduced  pay  of 
their  employees,  cancelled  many  trains,  cut  down  their 
overhead,  but  maintained  exorbitant  freight  and  passenger 
rates.  The  cry  was  constantly  heard  among  all  classes  of 
business  that  delayed  railroad  rate  liquidation  was  the  cause 
of  prolonged  distress.  The  railroads  countered  with  the 
claim  that  if  they  were  prosperous  and  making  money  they 
would  buy  material  and  supplies  and  revive  industries  de- 
pending upon  them.  They  also  claimed  that  they  were 
entitled  to  the  high  rates  because  their  properties  were 
commandeered  during  the  war  and  they  were  not  allowed  to 
make  the  big  profits  other  industries  made ;  but  they  failed 
to  mention  the  point  that  the  Government  guaranteed  and 
paid  them  interest  on  millions  of  dollars  worth  of  watered 
stock,  establishing  that  stock  at  a  definite  figure  after  years 
of  argument  and  dispute.  The  Government's  final  stamp  of 
approval  on  that  watered  stock  meant  fortunes  to  the  rail- 
roads. 

Hobson  says :  "Excessive  production  of  transport-machin- 
ery, especially  of  railways,  has  played  an  important  part  as 
an  immediate  cause  of  modern  trade  depression.  The  de- 
pression beginning  in  1873,  and  culminating  in  1878  is 
described  as  having  its  origin  'in  the  excessive  lock-up  of 
capital  in  the  construction  of  railways,  especially  in  Ameri- 
ca and  Germany,  many  of  which,  when  built,  had  neither 
population  to  use  them  nor  traffic  to  carry.' " 

Mr.  Bowley  points  out  that  "after  each  of  the  great  rail- 
way booms  of  the  century,  for  instance  in  England  about 
1847,  in  America  before  1857  and  1873,  in  India  in  1878,  and 
on  the  Continent  in  1873,  the  collapse  has  been  very  violent ; 
for  the  materials  are  bought  at  exaggerated  prices;  the 
weekly  wage  during  construction  is  enormous ;  no  return  is 
obtainable  till  the  whole  scheme,  whose  carrying  out  prob- 
ably lasts  many  years,  is  complete." 

Again,  Hobson  says:  "A  great  deal  of  this  railway  en- 
terprise meant  over-production  of  forms  of  transport-capi- 
tal and  a  corresponding  withholding  of  current  consump- 
tion. In  other  words,  a  large  part  of  the  'savings'  of  Eng- 
land, Germany,  America,  etc.,  invested  in  these  new  rail- 


360  HISTORY  OF  BUSINESS  DEPRESSIONS 

ways,  were  sterilized;  they  were  not  economically  needed 
to  assist  in  the  work  of  transport,  and  many  of  them  remain 
almost  useless,  as  the  quoted  value  of  the  shares  testifies. 
It  is  not  true,  as  is  sometimes  suggested,  that  after  a  great 
effort  in  setting  on  foot  such  gigantic  enterprises,  a  collapse 
is  economically  necessary.  If  the  large  incomes  and  high 
wages  earned  in  the  period  prior  to  1873,  when  capital  and 
labour  found  full  employment  in  these  great  enterprises, 
had  been  fully  applied  in  increased  demand  for  commodi- 
ties and  an  elevated  standard  of  consumption,  much  of  the 
new  machinery  of  transport,  which  long  stood  useless, 
would  have  been  required  to  assist  in  forwarding  goods 
to  maintain  the  raised  standard  of  consumption.  This  argu- 
ment, of  course,  assumes  that  ignorance  or  fraud  have  not 
caused  a  misdirection  of  investment." 

No  one  would  accuse  old  Henry  Clews  of  being  a  radical 
or  a  demagogue,  and  yet  Clews  in  no  uncertain  language 
accuses  railroad  manipulation  as  being  the  primary  cause 
of  practically  all  of  our  business  depressions  from  1837  to 
and  including  1903.  He  said,  "They  rest  upon  an  intrinsi- 
cally rotten  and  dishonest  foundation."  Had  it  not  been  for 
the  actual  wealth  created  by  opening  up  the  new  countries 
through  which  they  passed  results  would  have  been  worse. 
Clews  says  regarding  their  value,  "They  are  essentially 
deceptive  and  unjust  and  involve  an  oppressive  taxation 
upon  the  public  at  large  for  the  benefit  of  a  few  individuals." 
Periods  of  depression  caused  great  loss  to  railroad  stock- 
holders when  at  different  times  most  all  the  American 
railroads  failed,  but  those  on  the  inside  bought  up  the  frag- 
ments, consolidated  them  with  other  lines,  and  in  the  end 
reaped  still  larger  profits. 

The  statement  is  often  heard  that  the  railroad  balance 
sheet  is  the  best  reflector  of  business  conditions.  It  is  true 
that  the  history  of  railroads  has  been  closely  aligned  with 
the  history  of  depressions,  and  scandals  of  high  financing, 
with  the  result  of  loss  of  millions  of  stockholders'  money  is 
still  fresh  in  the  minds  of  those  living  today  who  can  look 
back  over  various  periods  of  depression.  It  is  claimed  that 
the  bursting  of  the  Credit  Mobilier,  followed  by  the  illegal 


HISTORY  OF  BUSINESS  DEPRESSIONS  361 

finance  methods  exposed  in  the  Erie  Railroad  scandal, 
brought  on  the  panic  of  1873. '  Some  railroad  men  got  the 
credit  for  bringing  on  a  few  of  our  panics.  No  doubt  Jay 
Gould  deserves  considerable  of  the  blame  for  the  crisis  of 
1873  and  Hill  and  Harriman  that  of  1903  and  1907.  There 
is  also  no  doubt  but  that  a  lot  of  dishonest  financiering  dur- 
ing the  latter  part  of  the  Nineteenth  Century  in  railroad 
circles  helped  to  bring  about  most  of  the  disastrous  depres- 
sions which  swept  the  industrial  world. 

In  the  latter  part  of  the  Nineteenth  Century  the  public 
was  wild  over  railroad  investments.  They  saw  a  few  men, 
such  as  Gould,  Vanderbilt,  Cooke  and  others,  make  great 
fortunes  in  the  railroad  business.  True,  it  later  proved  these 
fortunes  were  made  more  by  manipulations  than  from 
profit,  but  this  led  to  great  speculation  in  railroad  stocks 
which  periodically  went  through  the  storm  and  their  values 
were  swept  away.  However,  it  may  safely  be  predicted 
that  our  railroad  panics  like  our  money  panics  are  a  thing 
of  the  past.  The  railroads  of  the  country  are  so  all-impor- 
tant that  they  affect  materially  every  interest.  If  they  do 
not  earn  we  can  expect  hard  times;  on  the  other  hand,  if 
the  rates  are  as  high  as  the  railroads  claim  they  must  be 
in  order  to  earn,  industry  is  adversely  affected  so  that  the 
railroad  problem  is  going  to  be  one  that  more  and  more 
affects  the  prosperity  and  progress  of  the  country  in  the 
future. 

Our  economical  life  is  so  interwoven  with  the  railroads 
that  they  are  a  part  and  parcel  of  every  line  of  indus- 
trial endeavor.  We  can  get  an  idea  of  how  important 
they  are  when  we  think  of  their  nominal  capitalization, 
stocks  and  bonds,  amounting  to  more  than  eighteen  billion 
dollars,  and  on  these  securities  over  $600,000,000  must  be 
paid  annually  in  interest  and  dividends.  American  railroads 
are  the  largest  single  vested  industry  in  the  world. 


CHAPTER  XXXV 

THE  MONEY  QUESTION  AS  A  FACTOR  IN 
DEPRESSIONS 

So  great  was  the  influx  of  silver  from  the  new  mines  in 
Mexico  and  Peru  during  the  Seventeenth  Century  that  a 
revolution  in  prices  ensued.  Silver  became  so  plentiful  in 
Europe  that  a  given  weight  of  it  would  only  purchase  25  to 
50  per  cent  of  what  it  would  have  brought  before  the  dis- 
covery of  the  American  mines.  The  serious  result  of  this 
price  revolution  can  be  left  to  the  imagination  of  the  reader. 

With  the  recurrence  of  trade  depressions ,  the  money 
question  has  been  debated  from  every  angle.  Many  writers 
point  to  the  above  and  similar  examples  to  prove  that  busi- 
ness depressions  are  governed  by  the  rise  and  fall  in  the 
production  of  precious  metals. 

Some  people  wonder  why  gold  producing  countries,  such 
as  the  United  States,  Australia,  South  Africa,  are  not  enor- 
mously wealthy.  But  if  all  their  gold  were  retained  they 
would  soon  be  gold  poor.  When  a  person  gets  beyond  the 
point  of  earning  just  enough  to  secure  the  necessities  of  life, 
he  becomes  an  investor ;  wants  to  live  from  the  work  of  oth- 
ers. Therefore  he  must  lend  his  money  out  on  interest  and 
an  abundance  of  gold  in  a  given  country  naturally  brings 
small  interest  rates.  So  that  the  gold  is  sent  out  of  the  gold 
producing  countries  to  those  countries  where  it  will  bring  the 
largest  interest  returns.  Gold  flows  to  countries  where  there 
is  a  strong  demand  for  money  and  high  rates  of  interest. 

Some  believe  today  we  are  on  a  gold  basis,  having  heard 
so  much  of  the  gold  standard,  but  "if  a  lender  of  money 
wishes  to  secure  repayment  in  gold,  he  must,  today,  as  well 
as  before  this  act  was  passed,  expressly  stipulate  for  gold 
in  the  contract." 


HISTORY  OF  BUSINESS  DEPRESSIONS  363 

From  1850  to  1875  there  had  been  produced  as  much 
gold  as  was  produced  from  the  discovery  of  America  in 
1492  to  the  year  1850 — 357  years.  In  forty  years  we  had 
produced  about  $5,300,000,000  of  gold  as  against  the  previ- 
ous production  of  about  $3,000,000,000.  What  has  become 
of  this  gold  ?  We  know  we  have  more  gold  than  ever  before, 
yet  most  of  it  is  hidden  from  sight.  We  know  how  much  is 
in  the  National  Treasury  and  the  bank  gold  reserves  of  the 
world,  yet  where  is  the  production  outside  of  this  amount? 
The  only  answer  is  that  it  is  hidden  in  countries  afflicted 
with  unstable  finances,  or  used  in  the  arts. 

In  the  United  States,  France  and  other  countries  we 
have  what  is  called  the  "limping  standard"  of  silver  coins, 
the  amount  of  which  is  strictly  limited.  For  instance,  in 
this  country  we  have  a  certain  amount  of  silver  dollars 
with  silver  certificates  issued  against  them.  The  value  of 
the  silver  dollar  fluctuates,  sometimes  being  one-half  its  face 
value,  yet  they  are  accepted  without  question  in  trade  be- 
cause of  the  limit  placed  on  their  issue.  If  this  limit  were 
taken  off  it  is  easy  to  see  that  there  would  be  immediate 
financial  difficulty  and  consequent  trade  depression.  Again, 
we  issue  paper  money  redeemable  in  gold,  which  is  readily 
accepted  at  its  face  value.  Suppose,  however,  there  should 
be  an  over-issue  of  this  money.  In  case  of  catastrophe  of 
some  sort  confidence  would  be  undermined  and  the  holder 
of  these  notes  would  immediately  present  them  for  re- 
demption. They  would  be  redeemed  and  yet  the  fact  that 
the  Treasury  was  being  drained  of  its  gold  would  of  itself 
create  a  lack  of  confidence  and  trade  depression  would  re- 
sult. Gold  itself  is  not  always  of  the  same  value  and  many 
times  the  over-production  of  gold  has  led  to  serious  economic 
consequences.  For  these  reasons  many  believe  that  confi- 
dence in  the  economic  and  governmental  structure  is  a 
stronger  foundation  than  metallic  money,  because  it  has 
been  proven  by  experience  that  money  itself,  of  whatever 
kind,  loses  its  value  to  a  considerable  extent  when  there  is 
lack  of  confidence. 


364  HISTORY   OF   BUSINESS   DEPRESSIONS 

Most  of  our  panics  have  been  money  panics,  and  the  de- 
pressions that  followed  were  caused  by  scarcity  of  circulat- 
ing medium,  due  to  banks,  of  necessity,  restricting  loans 
and  credit.  Hoarding  of  circulating  medium,  particularly 
gold  and  silver,  is  also  an  important  factor. 

"During  the  depression  of  1837  the  ratio  between  gold 
and  silver  coinage  was  set  at  16  to  1.  Gold  had  hitherto 
been  undivided  and  the  weight  of  the  gold  dollar  was  re- 
duced from  27  grains  to  25.8  grains,  nine-tenths  fine.  Fol- 
lowing this,  gold  rapidly  came  back  into  circulation.  In 
the  years  that  followed,  all  kinds  of  circulating  medium  in 
the  form  of  paper  was  used,  which  resulted  in  great  confu- 
sion on  account  of  the  lack  of  uniformity  of  note  issues.  It 
is  recorded  that  as  many  as  5,400  different  kinds  of  spuri- 
ous or  counterfeit  notes  were  in  circulation  from  1837  until 
the  establishment  of  the  national  banking  system  in  1863." 

Our  smaller  circulating  medium  is  issued  purely  on  a 
confidence  basis.  For  instance,  silver  coins  smaller  than 
the  dollar  are  legal  tender  up  to  ten  dollars  only,  while  cop- 
per and  nickel  coins  may  be  legally  tendered  for  only  25 
cents. 

In  every  depression  the  cry  arises  for  more  circulating 
medium  and  we  heard  the  cry  even  in  the  depression  of 
1920-21.  Some  proposals  have  been  made  for  various  stable 
governments  of  the  world  to  pay  their  debts  to  each  other 
through  an  issue  of  fiat  money  which  would  be  exchanged 
from  one  to  another  and  put  into  circulation.  The  propo- 
nents of  this  scheme  claim  this  money  would  be  as  good  as 
treasury  notes  issued  by  the  various  countries,  or  Federal 
Reserve  notes  issued  in  this  country,  because  a  mortgage 
on  taxes  and  individual  property  could  be  placed  back  of 
them  as  security.  Admittedly  that  is  true,  so  far,  but  the 
difficulty  of  such  a  large  issue  of  fiat  money  is  that  confi- 
dence would  not  hold.  Some  day  such  notes  issued  in  the 
form  of  paper  money  would  have  to  be  retired  and  there 
would  be  a  question  in  the  minds  of  the  public  whether  the 
various  governments  could  raise  taxes  sufficient  to  pay 


HISTORY   OF   BUSINESS   DEPRESSIONS  365 

their  ordinary  running  expenses  and  retire  these  notes  at  a 
given  time.  Furthermore,  revolution  in  any  one  country 
could  cause  repudiation,  as  in  the  case  of  Russia,  thus  up- 
setting the  whole  scheme.  Any  number  of  additional  rea- 
sons could  be  given  why  public  confidence  in  such  an  issue 
would  be  shaken.  The  final  analysis  is  that  such  money  is 
but  a  promise  to  pay  and  its  value  would  depend  upon  pub- 
lic opinion  as  to  the  ability  of  the  various  governments  to 
so  pay. 

As  periods  of  depression  have  brought  about  a  clamor  on 
the  part  of  the  public  for  more  money,  the  politicians  often 
accede  to  the  persistent  demands  and  open  the  way  for  in- 
flation through  laws  permitting  the  issue  of  paper  money 
authorized  as  legal  tender.  Eventually  these  issues,  which 
may  have  started  to  relieve  depression,  were  of  themselves 
the  eventual  cause  of  another  depression  through  specula- 
tion, extravagance  and  finally  panic.  From  the  adoption  of 
the  Constitution  down  to  the  time  of  the  Civil  War  the 
United  States  Government  had  never  issued  paper  money. 
Gold  and  silver  alone  had  been  legal  tender. 

The  1857  crisis  was  known  as  the  gold  crisis.  The  situa- 
tion in  the  United  States  was  complicated,  as  it  was  in 
France,  by  the  changes  in  the  metallic  circulation  caused  by 
the  great  production  of  gold.  "Gold  took  the  place  of  silver 
as  the  overvalued  metal  at  the  coinage  ratio,  was  invariably 
chosen  by  debtors  for  payments,  and  silver  having  become 
the  dearer  metal,  disappeared  from  circulation,  in  spite  of  bi- 
metallic enactment  under  the  relentless  operation  of 
Gresham's  law." 

It  was  following  the  crisis  of  1837  in  this  country  and 
1839  in  England  that  financiers  and  economists  in  both 
countries  took  up  the  doctrine  that  "Bank-notes  are  a  form 
of  currency  entirely  distinct  from  other  commercial  paper 
and  forms  of  credit;  that  an  expansion  of  banknote  issues, 
even  when  redeemable  in  coin  on  demand,  is  a  potent  cause 
of  commercial  crises;  that  the  way  to  prevent  crises  is  to 
place  fixed  limits  upon  bank-note  issues."  This  plan  was 


366  HISTORY   OF   BUSINESS   DEPRESSIONS 

later  adopted  in  practically  all  countries  where,  particularly 
in  crises,  the  clamor  arose  for  an  unlimited  issue  of  paper 
money. 

We  no  longer  have  the  question  of  unsound  currency  in 
America,  France  or  Britain,  and  yet  we  have  depressions, 
so  the  recurrence  proves  the  fallacy  of  the  money  question 
being  at  the  root  of  the  evil.  The  depression  of  1857  came 
on  with  an  abuandance  of  gold.  There  was  no  lack  of  specie, 
so  the  money  question  could  not  be  blamed.  But  one  of  the 
surprising  features  of  the  panic  of  1857  was  the  disappear- 
ance of  gold  from  circulation  in  spite  of  the  enormous 
production  of  the  preceding  years. 

Quite  an  array  of  authorities  attribute  the  depression  of 
1857  to  an  over-supply  of  gold.  The  theories  as  to  the  gold 
output  and  its  relation  to  depressions  are  inconsistent. 

From  1800  to  1848  prices  gradually  fell  while  the  gold 
output  rose  steadily  from  the  new  mines  in  Russia  and  Si- 
beria, more  than  tripling.  Immediately  following  the  dis- 
covery of  gold  in  California  and  Australia  in  1848,  the 
world's  output  increased  more  than  six  times  in  three  years. 
Prices  rose  40  per  cent.  It  is  probable  that  from  this  and  a 
few  other  instances  in  history  so  many  writers  connect  the 
increase  of  gold  with  high  prices. 

Following  this  brief  period  the  figures  show  fairly  even 
production  up  to  the  crisis  of  1873,  just  preceding  which 
prices  went  slightly  higher  and  gold  production  slightly 
lower.  From  then  on  the  world's  gold  output  steadily  in- 
creased, while  prices  increased  only  gradually  up  to  the 
outbreak  of  the  World  War.  But  the  violent  rise  of  prices 
during  the  war,  it  is  conceded,  is  entirely  foreign  to  any 
connection  with  the  gold  output.  It  is  apparent  then,  that 
the  time-worn  theory  of  the  gold  output  and  prosperity  or 
depression  is  almost  entirely  without  basis  in  fact.  Gold 
sells  at  about  the  same  price  per  ounce,  regardless  of  the 
cost  of  material,  supplies  and  labor.  As  these  costs  mount 
during  the  period  of  inflation  the  mines  are  likely  to  curtail, 
and  when  depression  sets  in  and  costs  are  reduced  the  mines 


HISTORY  OF  BUSINESS   DEPRESSIONS 


367 


will  be  opened  or  reopened  so  that  production  of  gold  must 
naturally  be  larger  in  times  of  low  prices  than  of  high  prices. 
In  the  period  of  fifty  to  one  hundred  years  ago  there  used 
to  be  an  entirely  different  reason  given  for  these  years  of 
financial  failing  followed  by  industrial  reorganization.  It 
was  commonly  set  forth  that  lack  of  uniformity  in  laws, 
conflict  of  systems,  lack  of  a  strong  central  government 
and  the  fluctuating  value  of  fiat  money  were  the  underlying 


moo 


Prices  and  Gold  Output  1900-1920 


368  HISTORY  OF  BUSINESS  DEPRESSIONS 

causes.  True,  in  those  days  there  was  no  strong  central 
government.  This  developed  with  the  Civil  War  period. 
There  was  no  closely  interwoven  banking  system.  There 
was  no  sound  basis  for  paper  currency. 

Conant  says:  "The  fact  that  the  problem  remains  essen- 
tially one  of  capital  and  credit  rather  than  of  the  stock  of 
gold  was  demonstrated,  however,  by  the  conditions  of  the 
crisis  of  1907.  In  spite  of  the  outpour  of  gold  from  the 
mines  at  a  rate  never  equaled  or  approached  in  the  history 
of  the  race,  demand  outran  supply,  the  new  gold  did  not 
offset  the  maladjustments  of  capital,  and  the  money  market 
found  gold  an  unsatisfying  element  when  what  was  re- 
quired was  more  saved  capital  in  forms  adapted  to  the  con- 
tinuance of  production." 

After  our  various  crises  had  passed,  the  blame  was  ordi- 
narily laid  to  money  when,  in  reaity,  it  was  the  abuse  of 
what  money  we  had  that  was  the  real  cause.  It  is  true  that 
a  new  country,  poor  in  specie  and  with  large  demands  for 
loanable  capital  for  development,  may  be  forced  by  the  nec- 
essities of  her  situation  to  adopt  monetary  devices  which 
would  not  be  tolerated  under  better  conditions.  But  many 
of  these  systems  were  perfectly  harmless  if  they  had  not 
been  abused.  This  fact  was  shown  by  the  great  development 
of  the  United  States  under  what  were  really  very  unstable 
money  systems.  It  was  not  until  the  Civil  War  that  we  had 
our  present  National  Banking  System,  and  yet,  previous  to 
that  time,  we  had  developed  a  wonderful  system  of  railroads, 
canals,  commerce  and  trade,  and  built  up  large  cities  and 
thriving  communities.  The  whole  West  and  the  South  were 
built  up  largely  on  money  that  later  proved  of  no  value  and 
passed  out  of  existence.  It  has  only  been  in  more  recent 
years  that  we  have  adopted  the  gold  standard.  How  we 
did  it,  with  all  the  violent  panics,  crises  and  depressions  as 
recorded  in  this  book,  is  the  commercial  marvel  of  all 
time. 

Leslie  M.  Shaw,  known  as  a  conservative  of  conservatives, 
while  Secretary  of  the  Treasury  under  President  Roosevelt, 
proposed  the  following:  "I  would  add  an  amendment  per- 


HISTORY   OF  BUSINESS   DEPRESSIONS  369 

mitting  national  banks,  with  the  consent  of  the  Comptroller 
of  the  Currency,  to  issue  a  volume  of  circulating  notes  equal 
to  50  per  cent  of  the  bond-secured  circulation,  at  a  tax  of 
6  per  cent,  the  same  to  be  returned  at  will  (by  the  banks)  or 
by  the  direction  of  the  Comptroller,  by  the  deposit  of  an 
equal  amount  of  lawful  money,  with  any  sub-treasury." 
This  proposal  was  a  modified  form  of  the  present  Federal 
Reserve  notes  and  would  do  very  well  in  normal  times,  but 
in  a  crisis  under  a  national  strain  it  is  doubtful  if  this  would 
have  served  any  better  purpose  than  the  old  greenbacks, 
proving  that  most  any  kind  of  money  will  do  when  confidence 
is  right,  but  when  confidence  is  shaken  there  might  be  an- 
other tale  to  tell.  Comptroller  Ridgley,  after  the  panic  of 
1907  said:  "It  is  not  a  lack  of  confidence  of  the  people  in 
the  banks,  but  more,  it  is  a  lack  of  confidence  of  the  banks 
in  each  other." 

Cleveland  in  his  book,  "The  Bank  and  the  Treasury," 
(1908)  says:  "Those  who  have  expressed  opinion  concern- 
ing the  cause  of  the  recent  panic  used  the  same  fatalistic 
philosophy  as  was  employed  centuries  ago  in  accounting  for 
ravages  of  'black  death*  and  the  scourges  of  smallpox  and 
cholera.  From  time  immemorial  the  same  conclusions  have 
been  reached.  After  learned  discussion,  those  in  position  to 
command  respect  for  knowledge  of  financial  situations  have 
each  time  announced  that  sudden  collapses  of  bank-credit 
have  been  due  to  an  undefined,  intangible,  uncontrollable 
something  called  'lack  of  confidence/  "  He  goes  on  to  ask : 
"With  such  a  diagnosis  of  the  malady  by  those  who  are 
looked  to  professionally  for  prescription  of  remedies,  ques- 
tion may  be  raised  as  to  whether  we  may  ever  hope  to  find 
relief  from  financial  ills.  May  we  hope  to  correct  a  finan- 
cial disease  that  is  diagnosed  as  the  result  of  a  mental 
attitude  of  persons  who  may  not  be  located  and  spe- 
cifically treated?  Congress  is  asked  to  pass  remedial 
laws.  What  legislation  will  make  business  safe  as  against 
'what  some  people  may  think'  ?  How  many  bankers  may  be 
required  to  conduct  their  business  to  prevent  'some  people' 
from  losing  confidence?  Does  not  such  an  analysis  suggest 
that  the  philsophy  of  banking  is  still  surrounded  by  the 
ignorance  and  mysticism  of  the  dark  ages,  and  that  public 
inquiry  is  still  lacking  in  methods  of  scientific  research?" 


370  HISTORY  OF  BUSINESS  DEPRESSIONS 

Some  will  agree  and  others  disagree  with  this  writer. 
Some  will  claim  that  depressions  do  not  come  from  lack  of 
confidence  and  that  we  are  going  to  remedy  the  causes  and 
avoid  them  in  the  future.  It  is  going  to  require  something 
more  than  a  changed  state  of  mind.  We  are  going  to  have 
to  change  our  system  by  law  and  curtail  the  practice  of 
gambling  with  other  peoples'  money.  On  the  other  hand,  it 
is  true  that  there  have  been  panics  and  depressions  caused 
by  lack  of  confidence,  particularly  in  the  old  days  of  money 
panics  and  depressions.  This  is  proven  by  the  fact  that 
after  our  hysteria  we  went  right  ahead  with  the  same  identi- 
cal money  issued  on  the  same  basis.  We  attributed  certain 
panics  to  our  currency  system,  and  yet  before  we  changed 
the  system  we  went  ahead  for  periods  of  years  prospering 
beyond  precedent.  One  trouble  is  that  we  are  over-confident 
when  we  should  be  cautious.  Those  watching  the  economic 
situation  have  invariably  been  able  to  foretell  trouble  ahead 
and  yet  who  will  not  admit  that  the  public  absolutely  refuses 
to  take  heed.  And  then,  on  the  other  hand,  when  in  the 
middle  of  a  period  of  depression,  with  conditions  much 
sounder,  credits  well  deflated,  reserves  higher,  we  witness 
the  phenomenon  of  entire  lack  of  confidence  at  the  time 
when,  for  our  own  good  and  for  sound  reasons,  we  should 
have  confidence.  If  this  is  not  a  study  in  psychology,  what 
is  it? 

It  is  plain  to  students  of  the  question  that  in  time  of 
stringency  it  is  not  a  question  of  lack  of  currency  so  much 
as  the  need  of  a  proper  system  of  deposit  accounts,  simi- 
lar to  the  Baltimore  plan  which  has  been  suggested,  whereby 
a  borrower  whose  paper  may  not  be  approved  by  the  Federal 
Reserve  Banks  can  get  what  he  must  have  above  all  things, 
a  loan.  Once  given  the  loan  he  has  no  difficulty  in  finding 
a  medium  of  exchange  by  which  he  can  transform  this  loan, 
in  the  form  of  a  deposit  credit  in  a  way  to  meet  his  obliga- 
tions and  save  himself  from  hasty  ruinous  liquidation. 
This  is  simply  a  system  whereby  business  men  exchange 
what  might  be  termed  certificates  of  credit  in  the  same  way 


HISTORY  OF  BUSINESS   DEPRESSIONS  371 

that  banks  have  always  done  among  themselves  through 
their  clearing  houses  in  times  of  stress. 

"If  we  analyze  the  habits  of  the  gold-using  countries,  who 
are  infinitely  the  richest  countries  of  the  world,"  writes  a 
contemporary,  "we  see  that  their  medium  of  exchange  con- 
sists of  gold,  a  note  issue  and  various  instruments  of  credit. 
Now  the  note  issue  is  based  on  gold  and  the  instruments  of 
credit  are  based  on  both  the  other  two.  That  implies  that  any 
diminution  in  one  will  effect  a  proportionate  diminution  in 
both  the  others.  It  is  also  true  that  in  a  financial  crisis  all 
credit  is  naturally  contracted,  which  results  in  the  natural 
consequence,  that  there  is  a  lower  proportion  of  instruments 
of  credit  based  on  gold  and  notes  in  hard  times  than  in  good 
times.  Let  us  suppose  for  the  sake  of  example,  that  such  a 
ratio  of  credit  to  actual  currency  is  about  7  to  1  in  a  normal 
state  of  trade,  sinking  as  low  as  only  5  to  1  in  times  of 
stringency.  The  fall  might  possibly  be  much  greater.  How- 
ever, on  that  hypothesis  and  in  order  to  see  the  immense 
effect  of  the  drain  of  a  small  amount  of  gold,  we  may  as- 
sume a  sudden  withdrawal  from  general  use  for  temporary 
purposes  of  $250,000,000  in  gold  out  of  a  supposed  world 
stock  of  $10,000,000,000.  Out  of  these  $10,000,000,000  not 
more  than  $5,000,000,000  will  presumably  be  near  enough 
to  the  source  of  the  initial  disturbance  to  be  susceptible  to 
the  first  sudden  shock.  The  remaining  $5,000,000,000  are 
therefore  by  hypothesis  considered  to  be  far  enough  away 
to  be  quiescent;  because  no  shock  is  great  enough  at  one 
moment  to  actually  effect  the  whole  world,  even  though 
the  ultimate  effects  of  the  shock  will  spread  everywhere. 
Let  us  also  assume  a  ratio  of  2  to  1  for  notes  based  on  gold. 
The  whole  stock  of  money  before  the  shock,  say  in  October, 
within  the  affected  area  is  then  supposed  to  consist  of  $5,- 
000,000,000  of  gold,  of  $10,000,000,000  of  notes  and  of 
$105,000,000,000  of  credit  embodied  in  paper,  such  as  bills, 
cheques  and  drafts.  This  last  figure  is  estimated  at  the 
favorable  ratio  of  7  to  1,  based  on  the  combined  currency 
of  gold  and  notes  together.  Now  the  sudden  and  unannounc- 
ed withdrawal  of  $200,000,000  of  gold  in  November,  if  it 
caused,  as  it  certainly  would,  a  temporary  stringency  and  a 
panic,  would  compel  the  immediate  hoarding  and  retention 
of  at  least  an  equivalent  amount  of  gold  and  of  a  proportion- 
ate amount  of  notes  by  bankers  and  financial  houses,  result- 
ing in  abstraction  from  use  of  at  least  $500,000,000  of  gold 
and  $1,000,000,000  of  notes.  At  the  same  time  the  pro- 


372  HISTORY   OF   BUSINESS   DEPRESSIONS 

portion  of  private  paper  credit  would  shrink  rapidly  to  the 
panic  ratio  of  5  to  1  on  the  reduced  currency.  The  total 
available  medium  of  exchange,  using  the  term  in  its  widest 
sense,  at  the  end  of  November  would  have  fallen  to 
$4,500,000,000  of  gold,  $9,000,000,000  of  notes,  provided 
there  had  been  no  fresh  issue  by  the  states  involved,  and 
$67,500,000,000  of  paper  credit.  In  other  words,  the  total 
available  money  within  the  area  of  disturbance  would  have 
been  $120,000,000,000  in  October  and  $81,000,000,- 
000  in  November,  a  shrinkage  in  the  real  medium  of  ex- 
change in  current  use  over  that  area  of  $39,000,000,000, 
due  to  the  sudden  abstraction  of  only  $200,000,000  of  gold." 

As  before  stated  business  depressions  are  more  or  less 
interwoven  with  the  financial  situation.  In  times  of  specu- 
lation, over-production  and  expanded  credits,  business  must 
suffer  until  the  financial  situation  relieves  itself.  With 
crop  failures,  strikes,  political  uncertainties  and  lack  of  de- 
mand, business  must  again  adjust  itself,  but  more  easily  be- 
cause at  such  times  the  financial  system  can  use  its  reserve 
to  tide  over  the  period.  To  avoid  serious  depression,  then, 
it  is  necessary  to  keep  the  financial  system  healthy  so  that 
it  can  contract  and  expand  with  facility  and  ease.  In  times 
of  prosperity  credits  must  not  be  expanded  to  such  an  ex- 
tent that  there  are  not  ample  reserves  to  carry  borrowers  in 
case  of  sudden  stress  or  even  to  loan  them  more  if  their 
collateral  justifies  it.  This  will  keep  any  solvent  institution 
from  falling.  On  the  other  hand,  in  times  of  unfavorable 
conditions  such  as  crop  failures,  etc.,  credit  should  not  be 
extended  on  too  liberal  a  basis,  but  sparingly,  so  that  when 
the  tide  turns  the  debtor  does  not  have  to  exhaust  himself 
in  liquidating  his  debts,  but  can  more  quickly  return  to  his 
normal  buying  power.  Every  business  man  and  investor 
should  study  carefully  the  Federal  Reserve  Act  and  watch 
the  reports  of  the  Board,  which  are  valuable  in  many  ways, 
particularly  when  it  can  be  plainly  seen  that  the  limit  of 
credit  is  reached. 

On  this  one  question  the  business  man  can  agree  with  the 
theorist:  That  money  is  valuable  to  the  extent  that  it  re- 
flects confidence.  Legal  tender  notes  are  not  dollars.  It  is 


HISTORY   OF   BUSINESS   DEPRESSIONS  373 

clear  that  this  money  that  we  carry  in  our  pockets  is  a 
promise  to  pay.  A  promise  to  pay  a  dollar  cannot  of  itself 
be  a  dollar.  Money,  then,  is  valuable  only  to  the  extent  of 
the  knowledge  or  confidence  that  it  can  be  exchanged  for 
a  gold  dollar.  But  even  after  we  get  the  gold  it  will  also 
fluctuate  and  the  metal  in  it  buys  more  goods  or  less  goods 
under  different  conditions. 

The  most  valuable  thing,  therefore,  in  the  business  world, 
is  not  money,  not  gold,  but  confidence.  Gold  is  valuable  be- 
cause of  the  universal  confidence  in  that  metal.  Outside  of 
its  scarcity,  it  has  little  practical  value.  In  fact,  gold  is  like 
everything  else,  even  the  commonest  thing,  in  that  in  times 
of  great  production  it  has  become  cheap  and  its  buying 
power  lessened. 

As  we  examine  the  pages  of  history  we  find  that  pros- 
perity and  depression  have  come  during  every  kind  of  money 
condition.  In  spite  of  all  that  has  been  said  and  written 
on  the  money  question  as  affecting  panics  and  depressions, 
we  are  coming  to  realize  that  we  have  been  chasing  false 
causes.  The  indisputable  fact  is  that  we  have  had  prosperity 
when  we  have  had  confidence,  and  we  have  had  depression 
when  there  developed  lack  of  confidence.  Today  all  great 
countries  of  the  world,  excepting  China,  are  on  a  gold  basis, 
yet  civilization  does  not  use  gold  currency  in  its  trade  be- 
tween individuals,  and  we  do  not  care  for  gold.  If  it  is 
tendered  we  almost  invariably  pass  it  back,  preferring 
paper.  Why?  Confidence. in  the  paper.  And  while  the  paper 
is  mostly  redeemable  in  gold  we  know  that  there  is  not  any- 
where near  sufficient  gold  to  redeem  all  the  issues. 

The  advance  of  civilization  is  getting  us  past  the  stage 
of  considering  gold  the  one  single  thing  of  value.  We  have 
reached  a  point  where  we  can  capitalize  our  accumulated 
wealth  in  other  forms,  such  as  farms,  real  estate,  public 
utilities  and  certain  industries. 

Advocates  of  the  gold  standard  used  to  point  out  the  dis- 
astrous results  of  the  issue  of  both  silver  dollars  and  legal 
tender  paper  money.  It  is  true  that  both  of  these  forms  of 


374  HISTORY   OF   BUSINESS   DEPRESSIONS 

currency  have  at  various  times  depreciated  in  value,  but  that 
was  because  the  eventual  over-issue  was  foreseen  and  sharp 
traders  immediately  began  to  discount  their  face  value.  In 
1890  the  Government  accumulated  a  large  quantity  of  gold 
and  offered  to  redeem  all  outstanding  paper  money  at  par, 
yet  very  little  of  it  was  ever  sent  to  the  treasury  for  re- 
demption. Why?  Because  confidence  in  it  had  been  restored. 
It  would  have  been  interesting  to  see  what  would  have 
happened  if  all  the  greenbacks  issued  at  that  time,  totaling 
around  $400,000,000,  had  been  sent  in  for  redemption.  They 
could  not  have  been  redeemed  without  serious  embarrass- 
ment of  far-reaching  consequence.  Yet  every  individual 
had  confidence,  because  he  knew  his  neighbor  had  confidence. 
No  bank  could  pay  its  depositors  at  any  one  time,  that  is  uni- 
versally known  and  yet  its  notes  are  accepted  without  ques- 
tion. 

All  economists  are  familiar  with  Gresham's  law  i.  e.  that 
bad  money  drives  out  good  money.  This  applies  to  paper 
money  as  well  as  to  metallic  money.  When  competition 
works  freely  there  is  an  effort  to  do  all  work  at  the  least  ex- 
pense and  with  the  largest  returns.  On  that  basis  a  fiat 
paper  money  ought  to  circulate  and  do  the  money  work,  but 
the  difficulty  with  such  a  suggestion  is  that  the  holders  of 
the  paper  money  want  finally,  something  that  can  be  con- 
verted into  value.  Hence  there  must  be  a  value  basis  for 
money  of  any  kind.  We  have  come  to  a  point  where  that 
basis  does  not  have  to  be  gold,  provided  we  have  confidence 
in  the  commodity  that  takes  the  place  of  gold,  with  possi- 
bly a  comparatively  small  reserve  of  gold  mostly  for  use 
in  settling  international  balances.  "Gold's  utility  does  not  lie 
in  the  substance  of  which  it  is  composed  but  in  the  service 
which  it  renders.  It  is  a  common  impression  in  the  case 
of  standard  gold  money,  that  the  money  is  valuable  because 
it  is  gold,  whereas  it  would  be  more  accurate  to  say  that 
gold  is  valuable  because  it  is  money.  We  all  know  that  a 
silver  dollar  and  a  paper  dollar  are  each  worth  a  dollar, 
not  because  of  the  substance  of  which  they  are  made  but  be- 


HISTORY  OF  BUSINESS  DEPRESSIONS 


375 


cause  they  do  the  work  of  a  dollar.  Nor  is  the  case  of  a  gold 
dollar  essentially  different.  It  may  be  admitted  that  gold 
as  a  substance  has  utilities  apart  from  its  use  as  a  monetary 
medium,  but  these  are  of  second  rank.  Apart  from  its  use 
for  adornment,  its  employment  in  the  arts  is  extremely 
limited.  On  the  other  hand,  a  very  large  portion  of  the  gold 
stock  of  the  world  is  performing  the  function  of  money, 
and  there  can  be  no  doubt  that  were  gold  deprived  of  its 
money  function  it  would  greatly  depreciate  in  value  as 
compared  with  other  commodities.  The  use  of  gold  as  money 
heightens  the  value  of  gold,  and  the  value  thus  given  to  gold 
is  imparted  to  the  other  forms  of  money  which  do  a  similar 
service  in  the  affairs  of  the  world." 

So  fluctuation  in  the  value  of  precious  metals  is  the 
strongest  argument  in  favor  of  the  point  that  confidence  or 
lack  of  confidence  enters  strongly  in  the  economic  question. 
As  before  stated,  the  purchasing  power  of  gold  has  varied 
over  a  wide  range,  sometimes  because  of  increased  or  de- 
creased production,  but  more  generally  according  to 
strength  of  confidence  on  the  part  of  the  people  in  govern- 
mental policy  and  business  conditions.  History  easily  proves 
that  the  value  of  money,  from  gold  on  through  to  paper, 
rises  and  falls  like  the  value  of  any  other  commodity,  proving 
that  psychological  confidence  supercedes  materialistic  forms 
of  money. 

A  Summary  of  United  States  Finances 


BANK  CLEARINGS.* 

Year. 

Total  money 
in  circulation. 

Dollars. 

Circu- 
lation 
per 
capita. 
Dollars. 

Year. 

New  York. 
Dollars. 

Total  United 
States. 

Dollars. 

1855  
1860  

5,632,912,098 
7,231,143,057 

1800 

26,500,000 
55,000,000 
67,100,000 
87,344,295 
186,305,488 
278,761,982 
418,020,247 
435,407,252 
714,971,860 
676,284,427 
718,616,114 

4.99 

7.60 
6.96 
6.78 
10.91 
12.02 
15.34 
13.85 
20.58 
17.51 
18.17 

1810  

1865..  . 

1870.. 
1871.. 
1872.. 

26,032,384,342 
27,804,539,406 
29,300,986,682 
33,844,369,568 

1820  

1830 

1840  

1850  

1873'.. 
1874.. 
1875.. 
1876  

35,461,052,826 
22,855,927,636 
25,061,237,902 
21,597,274,247 

1855.. 

1860 

1865  

1870     

1877  

23,289,243,701 

„. 

1871  

376 


HISTORY   OF  BUSINESS   DEPRESSIONS 


BANK  CLEARINGS.* 

Year. 

Total  money 
in  circulation. 

Dollars. 

Circu- 
lation 
per 
capita. 
Dollars. 
18.27 
18.09 
18.13 
17.16 
16.12 
15.58 
15.32 
16.75 
19.41 
21.71 
22.37 
22.93 
22.65 
23.03 
21.78 
22.45 
22.88 
22.52 
22.82 
23.45 
24.60 
24.06 
24.56 
23.24 
21.44 
22.92 
25.19 
25.62 
26.93 
27.98 
28.43 
29.42 
30.77 
31.08 
32.32 
32.22 
34.72 
34.93 
34.33 
34.20 
34.34 
34.56 
34.35 
35.44 
39.29 
45.74 
50.81 
54.33 
57.21 

Year. 

New  York. 

Dollars. 
22,508,438,442 
25,178,770,691 
37,182,128,621 
48,565,818,212 
46,552,846,161 
40,293,165,258 
34,092,037,338 
25,250,791,440 
33,374,682,216 
34,872,848,786 
30,863,686,609 
34,796,465,529 
37,660,686,572 
34,053,698,770 
36,279,905,236 
34,421,379,870 
24,230,145,368 
28,264,379,126 
29,350,894,884 
31,337,760,948 
39,853,413,948 
57,368,230,771 
51,964,588,564 
77,020,672,494 
74,753,189,436 
70,833,655,940 
59,672,796,804 
91,879,318,369 
103,754,100,091 
95,315,421,238 
73,630,971,913 
99,257,662,400 
102,553,959,069 
92,420,120,000 
96,672,301,000 
98,121,520,000 
89,760,344,971 
90,842,707,724 
147,180,709,461 
181,534,031,388 
174,524,179,029 
214,703,444,468 
252,338,249,466 

Total  United 
States. 

Dollars. 

1878  
1879  
1880  
1881  
1882  
1883  
1884  
1885...... 
1886  
1887  
1888  
1889  
1890  
1891  
1892  
1893  
1894  
1895  
1896  
1897  
1898  
1899  
1900  
1901  
1902  
1903  
1904  
1905  
1906  
1907  
1908  
1909  
1910  
1911  
1912  
1913  
1914  
1915  
1916  
1917  
1918  
1919  
1920  

1872  
1873  

741,548,708 
753,799,412 
776,083,031 
754,101,947 
727,609,388 
722,314,883 
729,132,634 
818,631,793 
973,382,228 
1,114,238,119 
1,174,290,419 
1,231,047,925 
1,243,925,969 
1,293,061,836 
1,250,011,531 
1,317,539,143 
1,372,164,870 
1,380,361,649 
1,429,251,270 
1,497,440,307 
1,601,347,187 
1,596,701,065 
1,661,307,165 
1,601,968,473 
1,506,434,966 
1,640,983,171 
1,837,859,894 
1,904,071,881 
2,055,150,997 
2,175,307,961 
2,249,390,551 
2,367,692,169 
2,519,142,859 
2,587,882,653 
2,736,646,628 
2,772,956,455 
3,038,015,488 
3,106,240,657 
3,102,355,605 
3,214,002,596 
3,284,513,094 
3,363,738,449 
3,402,015,427 
3,569,219,574 
4,024,130,567 
4.763,575,632 
5,379,427,424 
5,766,029,973 
6,087,555,087 

1874    

1875  

1876 

•  

1877  

1878  

1879 

1880 

52,126,704,488 
48,750,886,813  I 
53,501,411,510 
58,845,279,505 
57,298,737,938 
60,883,572,438 
58,880,682,455 
45,028,496,746 
50,975,155,046 
51,935,651,733 
54,179,545,030 
65,924,820,769 
88,828,672,533 
84,582,450,081 
114,819,792,086 
116,021,618,003 
113,963,298,973 
102,356,435,047 
140,592,087,616 
157,681,259,999 
154,476,830,537 
126,238,694,393 
158,877,192,100 
168,986,664,000 
159,539,539,000 
168,685,953,000 
173,193,009,000 
163,849,811,000 
163,098,715,000 
242,235,794,000 
305,044,436,000 
320,988,542,000 
387,912,219,000 
463,769,613,000 

1881  

1882  

1883...  . 

1884  

1885 

1886  

1887  

1888 

1889  

1890  

1891  

1892  

1893 

1894  

1895  

1896  ... 

1897  

1898 

1899  

1900  . 

1901  

1902  

1903  

1904  

1905  

1906  

1907  

1908  

1909  

1910  : 

1911  

1912  

1913.... 

1914  

1915  

1916  

1917  

1918  

1919  

1920  

"•United  States  Statistical  Abstract. 


CHAPTER  XXXVI 
PIG  IRON  AS  A  BAROMETER  OF  BUSINESS 

Pig-iron  is  accepted  in  business  circles  as  an  accurate 
barometer  of  trade.  It  is  indisputably  a  good  barometer  of 
immediate  existing  conditions,  and  this  chapter  contains 
some  data  bearing  upon  the  subject.  There  are  other  baro- 
meters, however,  that  some  think  are  better,  particularly 
cotton,  and  a  chapter  in  this  book  is  devoted  to  cotton  as  a 
barometer,  as  well  as  another  chapter  comparing  these  two 
great  commodities,  and  how  they  reflect  the  status  of 
business. 

The  world  has  used  iron  almost  since  we  have  had  a 
trace  of  history.  It  is  said  that  semi-savage  tribes  discov- 
ered iron  from  forest  fires  which  left  the  ores  in  a  molten 
state.  America  made  iron  from  the  very  beginning ;  a  year 
after  the  Jamestown  colony  was  settled  iron  was  smelted 
from  Virginia  ore. 

Extensive  iron  making  is  an  industry  of  countries  ad- 
vanced in  manufacturing.  It  requires  excellent  transporta- 
tion facilities,  many  laborers,  much  capital  to  build  and 
operate  the  enormous  plants,  and  the  large  market  which 
only  a  vast  population  can  give.  It  very  distinctly  is  not  a 
frontier  industry,  and  this  is  just  as  true  in  the  new  states  of 
the  United  States  as  it  is  in  Australia  or  South  America.  As 
a  result,  six  countries  dominate  the  iron  making  of  the 
world,  and  three  of  these  are  of  distinctly  minor  importance. 
The  United  States,  Great  Britain,  and  Germany  make  four- 
fifths  of  the  world's  supply;  Belgium,  France,  and  Russia 
are  the  next  group,  and  after  they  have  been  named  there 
is  little  left  of  the  world's  iron  industry  as  at  present  de- 
veloped. 

In  1800  England  was  the  leader  in  production  of  iron, 
producing  at  that  time,  with  a  population  of  8,000,000,  about 


378  HISTORY  OF  BUSINESS  DEPRESSIONS 

three  to  five  pounds  per  capita.  Let  us  compare  that  with 
the  production  at  the  close  of  the  World  War  when  the  out- 
put from  America,  Germany  and  Great  Britain  ranged  from 
500  to  1,000  pounds  per  capita.  For  the  period  of  colonial 
times  in  America  no  complete  data  is  available,  but  during 
the  Revolution  the  output  of  the  United  Colonies  must  have 
increased  quite  markedly,  for  the  demand  for  iron  products 
was  heavy  and  most  of  it  had  to  be  supplied  by  colonial 
furnaces  and  forges. 

The  iron  industry  got  away  to  a  bad  start  following  the 
Revolution,  when  it  had  been  stimulated  by  war  demands 
and  non-importation.  At  the  close  of  the  war,  however, 
iron  came  in  great  quantities  from  Great  Britain  and  local 
industry  could  not  compete.  A  study  of  the  iron  industry 
leads  to  the  conclusion  that  the  production  of  the  latter  half 
of  the  Eighteenth  Century  in  America  was  more  important 
as  a  factor  in  the  world's  output  than  during  the  first  fifty 
years  of  the  Nineteenth  Century.  During  the  latter  period 
the  United  States  lost  ground  steadily  as  compared  with  its 
leading  competitors.  It  was  not  until  the  Civil  War  that  it 
produced  the  same  percentage  of  the  world's  iron  output 
that  it  had  made  at  the  time  of  the  Revolution.  While  at 
the  close  of  the  Revolution  production  in  England  and 
America  was  about  even,  yet  fifty  years  later  England  was 
making  six  times  as  much  pig-iron  as  the  States.  It  was  not 
until  1890,  over  a  hundred  years  after  the  Revolution,  that 
the  two  countries  again  reached  equality  for  a  moment. 

Pig-iron  acted  as  a  good  barometer  in  the  1837  depression. 
Early  in  1836  iron  advanced  in  Philadelphia  from  $32  to 
$50.25  per  ton,  but  with  this  advance  consumption  apparent- 
ly fell  off  and  material  commenced  to  accumulate.  By  the 
end  of  the  year  the  accumulation  of  iron  became  alarming. 
Iron  began  falling  in  price  also  before  the  financial  panic 
broke. 

In  1847  iron  prices  again  advanced  and  yet  there  came  a 
check  in  demand,  but  this  depression  lasted  a  very  short 


HISTORY  OF  BUSINESS  DEPRESSIONS  379 

time  on  account  of  the  gold  discoveries  and  the  outbreak 
of  the  Mexican  War. 

In  the  four  years  previous  to  1857  iron  was  more  or  less 
depressed,  while  all  other  industries  flourished  immensely. 
It  was  also  true  that  iron  showed  less  the  effect  of  the  panic 
of  1857  than  any  other  industry.  In  this  instance  it  could 
not  be  taken  as  a  correct  barometer  of  actual  conditions. 
It  was  at  the  time  of  the  1857  derpression  that  iron  first 
was  characterized  as  being  "either  prince  or  pauper"  of 
industry. 

Our  great  advance  in  iron  during  the  last  half  of 
the  Nineteenth  Centruy  is  owed  to  the  protective  tariff 
policy.  Iron  and  steel  making  was  then  regarded  as  an  in- 
fant industry  and  protection  placed  on  foreign  imports 
stimulated  production  and  manufacture  of  products  in  this 
country. 

Iron  reflected  the  English  panic  in  1890,  precipitated  by 
the  Baring  failure,  to  the  extent  of  35  per  cent  within  five 
months.  Iron  consumption  fell  from  a  rate  per  annum  of 
9,200,000  tons  in  November,  1890,  to  a  rate  per  annum  of 
5,900,000  tons  in  April,  1891.  In  a  five-month  period  during 
the  1893  depression  iron  consumption  fell  from  a  9,400,000 
ton  per  annum  rate  to  a  3,800,000  ton  per  annum  rate. 
This  was  a  far  greater  falling  off  than  the  average  industry 
recorded,  even  during  the  panicky  months  when  the  depres- 
sion was  at  its  lowest.  The  output  of  pig-iron,  which  had 
been  about  9,157,000  tons  in  1892,  fell  to  6,657,000  tons  in 
1894. 

During  the  depression  of  1893,  lasting  to  1896,  new  econo- 
mies were  introduced  into  our  industrial  establishment. 
Even  with  an  abundance  of  water  in  our  inflated  capitaliza- 
tion we  found  w«  could  sell  pig-iron  at  a  profit  at  $10  to  $12 
per  ton ;  steel  rails  were  sold  with  a  liberal  return  to  capital 
at  $17.50  per  ton,  and  bar  iron  entered  a  profitable  market 
at  95  cents  per  hundred. 

Cotter's  "History  of  the  United  States  Steel  Corporation" 
gives  the  uncertainty  in  the  trade  as  one  of  the  primary  rea- 


380  HISTORY  OF  BUSINESS  DEPRESSIONS 

sons  for  the  formation  of  the  giant  trust,  setting  forth  that 
the  control  of  the  industry  in  a  few  hands  would  stabilize 
it  against  the  sharp  rise  and  fall  of  previous  times. 

"It  was  inevitable  that  there  should  be  a  dark  side  to  the 
picture  and  that  it  should  be  particularly  black  in  obedience 
to  the  natural  law  that  provides  that  the  severity  of  the  fall 
shall  be  proportioned  to  the  height  of  the  climb.  The  boom 
times  of  the  steel  trade  were  succeeded  with  disheartening 
regularity  by  periods  of  dearth.  One  year  steel  manufac- 
turers were  building  themselves  palaces  and  purchasing 
steam  yachts,  the  next  they  were  mortgaging  all  they  had 
to  pay  wages.  One  year  the  steel  worker  was  a  man  favored 
above  all  others  of  his  class,  the  next  he  was  getting  his 
meals  on  charity  from  the  'soup  houses'.  To  this  day  steel 
veterans  speak  of  the  dull  times  of  the  trade  as  'soup-house 
days.' " 

At  these  times  competition,  always  fierce,  became  more 
ruthless  than  ever.  The  old  adage  regarding  love  and  war 
was  stretched  to  include  the  steel  industry,  and  everything 
was  considered  fair  that  might  help  to  keep  the  mills  run- 
ning full.  Prices  were  cut — and  wages  with  them ;  steel  was 
"dumped"  on  foreign  markets  at  less  than  manufacturing 
cost,  and  steel  makers  resorted  to  every  means  that  offered 
to  divert  orders  from  competitors  to  themselves.  It  was  a 
case  of  'dog  eat  dog',  and  failures,  with  their  unavoidable  ac- 
companiment of  unemployed  labor,  were  all  too  frequent. 
The  frequent  and  prolonged  periods  of  depression  had 
forced  upon  steel  makers  the  conviction  that  some  way  of 
combining  to  prevent  their  recurrence  was  desirable,  even 
ncessary,  if  the  United  States  was  to  keep  and  increase  its 
lead  in  the  manufacture  of  the  metal  most  needed  by  the  age. 

In  the  1903  disturbance  iron  dropped  from  a  20,200,00  ton 
per  annum  rate  in  June  of  that  year  to  a  10,100,000  ton  per 
annum  rate  within  six  months.  There  was  no  widespread 
financial  panic,  but  a  general  deflation  and  slowing  up.  In 
May,  1907,  consumption  was  at  the  rate  of  27,000,000  tons 
per  annum  and  prices  were  the  highest  on  record.  It  held 


HISTORY  OF  BUSINESS  DEPRESSIONS 


381 


this  rate  until  October,  when  the  panic  broke,  and  within 
three  months  had  fallen  to  a  rate  of  12,500,000  tons  per 
annum.  The  unfilled  orders  of  the  United  States  Steel  Cor- 
poration, however,  at  that  time  were  indicative  of  a  slowing 
up.  On  January  1,  1907,  the  unfilled  order  of  that  corpora- 
tion amounted  to  8,489,718  tons,  while  on  September  30th, 
a  few  days  before  the  panic,  they  had  decreased  to  6,425,000 
tons,  a  falling  off  of  24  per  cent. 

Let  us  note  from  this  table  the  advance  of  iron  during  the 
prosperity  immediately  preceding  the  depressions  of  the 
periods  given : 


*From 
From 
From 
From 
From 
From 
From 
From 
From 
From 
From 


$38.00 
35.00 
23.00 
19.00 
20.00 
30.00 
19.00 
9.00 
13.15 
12.33 
15.26 


in  1823 
in  1833 
in  1843 
in  1852 
in  1861 
in  1871 
in  1879 
in  1897 
in  1900 
in  1904 
in  1915 


to  $75.00 
to  70.00 
52.50 
50.25 
80.00 
61.00 
41.00 
22.25 
23.84 
24.50 
44.39 


in  1825 
in  1837 
in  1845 
in  1856 
in  1864 
in  1872 
in  1880 
in  1899 
in  1902 
in  1907 
in  1920 


The  table  below  will  show  the  decline  in  the  price  of  iron 
following  the  periods  of  depression : 


*From 

$70.00 

in 

1837 

to 

$22.00 

in 

1843 

From 

52.50 

in 

1847 

to 

19.00 

in 

1852 

From 

50.25 

in 

1856 

to 

20.00 

in 

1861 

From 

80.00 

in 

1864 

to 

30.00 

in 

1871 

From 

61.00 

in 

1872 

to 

19.00 

in 

1879 

From 

41.00 

in 

1880 

to 

17.75 

in 

1885 

From 

21.00 

in 

1887 

to 

9.00 

in 

1897 

Fr»m 

22.25 

to 

1899 

to 

13.15 

in 

1900 

From 

23.84 

in 

1902 

to 

12.33 

in 

1904 

From 

24.50 

in 

1907 

to 

17.75 

in 

1909 

From 

16.57 

in 

1913 

to 

15.26 

in 

1915 

From 

44.39 

in 

1920 

to 

18.75 

in 

1922 

Figures  by  Hull. 


382 


HISTORY   OF  BUSINESS   DEPRESSIONS 


Right  after  the  shock  of  1907,  the  steel  corporation  hav- 
ing absorbed  its  principal  competittor — the  Tennessee  Iron 
and  Steel  Company — got  independents  together  with  them 
at  the  famous  Gary  dinners  and  artificially  regulated  con- 
ditions through  an  agreement  as  to  prices.  How  can  an  in- 
dustry be  an  accurate  barometer  of  trade  where  supply 
and  demand  can  be  controlled  through  other  than  natural 
courses  ? 

The  table  below  shows  the  cycles  of  trade  as  indicated 
by  pig-iron  prices.  It  will  be  noted  that  with  few  exceptions 
they  follow  the  general  trend  of  business  and  finance  as  a 
whole  through  the  periods  of  depression  and  prosperity:* 


1819. 
1820. 
1821. 
1822. 
1823. 


1828. 
1829. 
1830. 
1831. 
1832. 
1833. 
1834. 


1838. 
1839. 
1840. 
1841. 
1842. 
1843. 


DOWN  CYCLE 

._$39.75  per  ton  January 
._  35.00  per  ton  Average 
._  35.00  per  ton  Average 
._  35.00  per  ton  Average 
._  35.00  per  ton  Average 


UP  CYCLE 


_$35.00  per  ton 

.  35.00  per  ton 

.  35.00  per  ton 

.  35.00  per  ton 

.  35.00  per  ton 

.  38.50  per  ton 

_  28.50  per  ton 


January 
Average 
Average 
Average 
Average 
Average 
December 


.$35.00  per  ton  January 
.  30.00  per  ton  January 
.  32.75  per  ton  January 
.  28.50  per  ton  January 
.  27.75  per  ton  January 
.  25.00  per  ton  August 


1824. 
1825- 
1826. 
1827. 


.$37.25  per  ton  January 
.  46.75  per  ton  Average 
.  46.50  per  ton  Average 
.  46.50  per  ton  March 


1835. 
1836. 
1837. 


.$29.25  per  ton  January 
.  45.50  per  ton  Average 
.  47.00  per  ton  June 


1844. 
1845. 


.$27.00  per  ton  January 
.  32.00  per  ton  August 


*  Compiled  to  1911  by  Joseph  H.  Lynch. 
From  1911  from  figures  of  U.  S.  Department  of  Commerce. 


HISTORY  OF  BUSINESS   DEPRESSIONS 


383 


1846. 
1847. 
1848. 
1849. 
1850. 


1855. 
1856. 
18F7. 
1858. 
1859. 
1860. 
1861. 


1865. 
1866. 
1867. 
1868. 
1869. 
1870. 


1873. 
1874. 
1875. 
1876. 
1877. 


DOWN  CYCLE 

._$28.00  per  ton  January 
._  30.25  per  ton  Average 
._  26.50  per  ton  Average 
._  22.75  per  ton  Average 
._  20.00  per  ton  July 


_$35.12  per  ton 

_  27.12  per  ton 

_  26.75  per  ton 

_  22.25  per  ton 

_  23.37  per  ton 

_  22.75  per  ton 

_  18.67  per  ton 


January 
January 
January 
January 
January 
January 
October 


J58.12  per  ton  January 
46.87  per  ton  Average 
44.12  per  ton  Average 
39.25  per  ton  Average 
40.67  per  ton  Average 
31.25  per  ton  December 


.$45.17  per  ton  January 
.  30.25  per  ton  Average 
.  25.50  per  ton  Average 
.  22.25  per  ton  Average 
.  18.00  per  ton  December 


1882. 
1883. 
1884. 
1885. 
1886. 
1887. 
1888. 


.$25.75 
.  22.42 
.  19.81 
.  17.99 
.  18.71 
.  20.93 
.  18.00 


per  ton  March 
pe,r  ton  March 
per  ton  March 
per  ton  March 
per  ton  March 
per  ton  March 
per  ton  March 


1851. 
1852. 
1853. 
1854. 


.$21.50  per  ton  January 
.  22.62  per  ton  Average 
.  36.12  per  ton  Average 
.  38.00  per  ton  August 


1862. 
1863. 
1864. 


.$20.00  per  ton  January 
.  32.25  per  ton  January 
.  75.25  per  ton  Sept. 


1871. 
1872. 


.$34.25  per  ton  March 
.  53.87  per  ton  Sept. 


1878. 
1879. 
1880. 
1881. 


.$18.50  per  ton  January 
.  21.75  per  ton  Average 
.  28.50  per  ton  Average 
.  26.25  per  ton  Average 


1889. 
1890. 
1891. 


.$18.50  per  ton  Nov. 
.  19.90  per  ton  Nov. 
.  17.75  per  ton  Nov. 


384 


HISTORY  OF   BUSINESS   DEPRESSIONS 


1892. 
1893. 
1894. 
1895. 
1896. 
1897. 


1900. 
1901. 
1902. 
1903. 
1904. 


1908. 
1909. 
1910. 
1911. 


1914. 
1915. 


DOWN  CYCLE 

_  17.50  per  ton  January 
_  14.52  per  ton  January 
_  12.66  per  ton  January 
_  13.10  per  ton  January 
_  12.95  per  ton  January 
_  11.75  per  ton  January 


._$20.00  per  ton  June 
._  15.87  per  ton  June 
._  22.19  per  ton  June 
._  19.92  per  ton  June 
._  14.94  per  ton  June 


.  18.75  per  ton  February 
.$17.75  per  ton  January 
.  16.86  per  ton  Average 
.  15.75  per  ton  Average 


.$15.74  per  ton  Average 
.  15.26  per  ton  Average 


UP  CYCLE 


1898. 
1899. 


1905. 
1906. 
1907. 


1912. 
1913. 


1916. 
1917. 
1918. 
1919. 
1920. 


.$12.00  per  ton  January 
.  25.00  per  ton  Dec. 


.$17.75  per  ton  January 
.  20.91  per  ton  Average 
_  23.14  per  ton  Average 


.$16.06  per  ton  Average 
.  16.57  per  ton  Average 


.$21.18  per  ton  Average 
.  43.61  per  ton  Average 
.  36.66  per  ton  Average 
.  31.09  per  ton  Average 
.  44.39  per  ton  Average 


1921. 
1922. 


._$21.34  per  ton  November 
._  18.75  per  ton  February 


CHAPTER  XXXVII 
COTTON  AS  A  BAROMETER  OF  BUSINESS 

To  those  who  may  have  a  tendency  not  to  appreciate  the 
importance  of  the  fleecy  staple,  let  them  read  the  history  of 
cotton  and  they  will  find  interwoven  in  it  the  history  of 
the  progress  of  the  republic.  No  other  industry  compares 
with  it  in  importance.  The  idea  that  it  is  sectional  is  a 
mistaken  one,  because  when  it  is  carried  abroad  from  the 
southern  ports  through  the  lanes  of  commerce,  gold  flows 
back  in  return  through  the  ports  of  the  North.  And  the 
money  that  we  ourselves  spend  for  it  in  domestic  use  finds 
its  way  into  every  factory  and  every  bank  in  the  northern 
industrial  centers.  It  is  truly  a  national  commodity.  Alex- 
ander Hamilton,  himself  born  on  a  cotton  plantation  in  the 
West  Indies,  saw  great  future  possibilities  for  it,  and 
Thomas  Jefferson,  then  Secretary  of  State,  purchased  one 
of  Whitney's  first  gins. 

We  are  all  familiar  with  the  fable  of  the  vegetable  lamb, 
which  came  from  the  stories  of  Herodotus,  who  took  it  from 
the  mouths  of  Nomads,  who  traded  by  caravan  between 
India  and  Europe  and  told  the  western  world  that  in  India 
there  grew  "plants  bearing  fruit  within  which  there  is  a 
lamb  having  fleece  of  surpassing  beauty  and  excellence." 

Cotton  first  made  its  appearance  in  England  in  the  year 
1298,  and  in  the  Sixteenth  Century  had  begun  to  be  of  such 
general  use  that  a  clamor  arose  among  the  British  wool 
growers  and  manufacturers  gainst  its  use,  claiming  it  was 
so  much  cheaper  that  it  would  ruin  the  whole  industry. 
They  demanded  high  duties  in  order  to  keep  the  cotton  out 
of  the  country.  Opposition  arose  to  this  measure,  and  the 
wool  interests  were  given  relief  by  an  act  providing  that 
every  dead  person  should  be  buried  in  a  woolen  shroud,  in 
default  of  which  persons  directing  funerals  should  be  fined, 


386  HISTORY   OF   BUSINESS   DEPRESSIONS 

as  Blackstone  says  in  his  "Commentaries  on  the  Laws  of 
England" :  "Thus  encouraging  the  staple  trade  on  which  in 
great  measure  depends  the  universal  good  of  the  nation." 
It  is  credited  with  being  the  controlling  influence  in  that 
remarkable  period  known  as  the  Industrial  Revolution  in 
England  in  the  Eighteenth  Century. 

The  story  is  told  that  a  large  cotton  buyer  in  England  be- 
came wealthy  and  powerful  by  establishing  an  underground 
system  whereby  he  was  able  to  obtain  information  from  the 
spot  markets  in  America  two  or  three  days  ahead  of  his 
rivals.  Then  came  the  telegraph.  The  rival  installed  a 
private  wire.  The  first  cotton  buyer,  although  known  as 
keen  and  shrewd,  did  not  believe  that  such  information 
could  be  sent  with  any  degree  of  accuracy  over  a  wire  run- 
ning into  his  office.  He  ridiculed  the  idea,  but  at  an  op- 
portune time  the  rival  got  news  ten  days  ahead  of  the  first 
factor,  which  information  caused  the  latter  great  loss  and 
sent  him  to  an  inglorious  oblivion.  That  was  the  time  of 
the  inventions  of  Arkwright,  Cartwright,  Crompton,  Watt 
and  Hargreaves,  which  greatly  stimulated  cotton  manufac- 
turing and  cheapened  the  product. 

A  little  cotton  had  been  grown  in  the  Southern  States  for 
domestic  use  before  the  War  of  Independence,  but  the  quan- 
tity was  insignificant.  Previous  to  the  year  1790  we  had 
not  shipped  a  single  pound  abroad.  In  1791  cotton  was  ex- 
ported for  the  first  time,  only  189,000  pounds  being  shipped 
that  year.  Suddenly  the  export  of  the  staple  assumed  enor- 
mous proportions  and  by  1794  we  were  shipping  over  one 
million  pounds  abroad,  the  next  year  over  five  million 
pounds  and  so  it  continued  with  still  greater  strides. 

In  our  earlier  history  cotton  was  much  higher,  on  an 
average,  than  in  later  years  because  of  the  higher  cost  of 
transportation  and  ginning.  In  the  business  depression 
which  started  in  1808  middling  cotton  sold  on  the  market  at 
only  about  19  cents.  A  year  later  it  had  dropped  to  16 
cents.  It  was  not  at  that  time  considered  the  important 
commodity  that  it  began  to  assume  following  the  European 


HISTORY  OF  BUSINESS   DEPRESSIONS  387 

wars  of  that  period.  The  export  price  of  our  great  "money 
crop"  fell  from  32  cents  in  the  depression  of  1818  to  17.5 
cents  in  1820.  The  first  great  "bull  movement"  in  the  cotton 
market  was  inaugurated  in  1824-25  in  Liverpool,  when  prices 
advanced  from  7d.  to  16%d.  per  pound.  While  the  advance 
was  simply  speculative,  it  is  said  to  have  originated  in  the 
attempt  of  a  Liverpool  house  to  prove  that  cotton  production 
had  reached  its  limit,  and  that  the  demand  was  greater  than 
the  supply.  It  was  currently  reported  that  one  hundred  mil- 
lions sterling  had  been  raised  by  capitalists  to  buy  up  all 
cotton  in  sight.  But  no  doubt  one  cause  of  the  attempt  to 
"bull"  the  market  was  the  very  small  surplus  stocks  at 
Liverpool.  This  extraordinary  rise  in  prices  was  reflected 
in  our  own  markets,  the  New  York  market  advancing  from 
12  to  30  cents  a  pound. 

Following  this,  the  panic  of  1825  broke  in  England.  The 
reaction  reached  America  in  September,  1825,  and  the  fall 
in  price  created  a  short  depression  in  the  South  and  embar- 
rassed a  number  of  banks  in  the  North.  It  was  not  wide- 
spread nor  of  sufficient  magnitude  to  be  called  a  general 
crises. 

Three  years  later  came  the  depression  of  1828,  which 
brought  about  a  remarkable  fall  in  the  price  of  cotton  and 
all  the  people  of  the  South  were  in  distress. 

It  was  during  this  depression  that  the  matter  of  improv- 
ing the  general  grade  of  cotton  was  brought  forcibly  to  the 
southern  people,  and  planting  was  revolutionized  by  the 
study  of  better  seed  and  cultivation.  From  these  experi- 
ments came  Sea  Island  cotton,  with  its  long  and  strong  fibre. 
In  1830  cotton  sold  for  6  cents  a  pound  and  gradually  rose 
until  1835  when  it  sold  a  20  cents.  It  broke  in  1836  and  its 
break  hastened  the  crisis  of  the  following  year.  While  the 
country  has  always  realized  the  importance  of  cotton  in  our 
commercial  life,  it  was  at  this  time  that  it  began  to  be  taken 
as  a  barometer  of  business  conditions,  present  and  prospect- 
ive. 

Both  Callander  and  DeBow,  writing  of  the  period  previous 


388  HISTORY   OF  BUSINESS   DEPRESSIONS 

to  the  depression  of  1837,  describe  the  situation  in  similar 
words:  "Cotton  brought  in  $1,000,000,000  in  twenty  years, 
but  this  vast  revenue  was  not  expended  at  home.  It  was 
distributed  to  the  cotton  factors  and  shipmasters  of  the 
North  and  Great  Britain,  to  the  farmers  of  the  western 
country,  to  the  ironmongers  of  Pittsburg,  to  the  manufac- 
turers of  New  England.  The  cotton  crop  enriched  every 
section  of  the  country  except  the  cotton  belt.  It  set  in  mo- 
tion a  system  of  internal  commerce  which  promoted  the 
prosperity  of  the  United  States  more  than  any  other  single 
cause."  No  wonder  southern  children  sing  of  the  "bell- 
shaped,  changing-hued  cotton  blossom  thusly: 

"First  day  white,  next  day  red, 
Third  day  from  my  birth  I'm  dead; 
Though  I  am  of  short  duration, 
Yet  withal  I  clothe  the  nation." 

President  Biddle,  of  the  Second  National  Bank,  had  ma- 
neuvered things  so  as  to  make  a  lot  of  money  out  of  cotton 
previous  to  the  panic  of  1837.  He  bought  the  cotton  from 
the  southern  planters,  placing  it  in  warehouses  at  Havre  and 
Liverpool,  paying  the  planters  in  National  Bank  notes  and 
getting  hard  money  from  Europe.  These  bank  notes  were 
issued  without  security  and  for  unlimited  amounts,  and 
when  the  crisis  came  the  notes  depreciated  as  much  as  30 
per  cent,  causing  great  loss  to  the  Southern  planters  who 
held  them.  When  the  market  became  glutted  in  Europe  and 
the  price  fell  panic  followed  in  those  countries.  On  March 
15,  1837,  news  reached  New  York  that  the  great  cotton 
house  of  Herman  Briggs  &  Co.,  of  New  Orleans,  had  failed 
for  $8,000,000.  The  whole  Southwest  collapsed.  In  New 
Orleans  every  important  house  went  down,  one  concern 
owing  over  $15,000,000.  Cotton  fell  in  a  few  days  from  17 
to  10  cents,  and  the  effect  in  New  York  was  immediate. 
J.  L.  &  S.  Joseph  &  Co.,  with  connections  in  New  Orleans, 
failed  for  several  millions,  and  a  general  crash  followed. 

In  1835  cotton  commanded  20  cents  in  New  York  and  was 
equally  as  high  in  England,  due  to  the  speculation  of  the 


HISTORY  OF  BUSINESS   DEPRESSIONS  389 

times,  but  the  crop  of  1838,  following  the  depression  of  the 
previous  year,  brought  a  very  low  price.  In  1839  the  first 
convention  of  cotton  planters  was  held  at  Macon,  Ga.,  where 
various  plans  were  proposed  to  improve  conditions  and  se- 
cure better  prices. 

Until  1836,  with  few  exceptions,  the  crops  had  yielded 
very  profitable  returns.  Then,  with  the  financial  panic  of 
1837,  the  cotton  mills  curtailed  consumption,  while  the 
planters  increased  the  crops.  The  inevitable  result  was 
an  accumulation  of  stocks  and  a  fall  in  prices.  That  year 
cotton  was  the  first  commodity  that  pointed  the  way  to  the 
coming  crash.  In  a  few  days  during  the  early  part  of  April 
it  fell  nearly  50  per  cent.  A  month  later  New  York  banks 
began  suspending  specie  payment. 

In  1837  speculation  was  not  confined  to  western  lands; 
there  was  equal  recklessness  over  cotton  plantations  in  the 
Southwest,  particularly  in  Mississippi  and  Louisiana,  and  in 
the  real  estate  of  the  cities  which  controlled  the  cotton 
trade ;  "the  demand  for  the  raw  staple  was  greatly  increased 
by  the  growth  of  manufactures  of  cotton  goods  in  this  coun- 
try and  by  favorable  conditions  in  England.  The  result  was 
a  rapid  advance  in  the  price  of  cotton,  and  also  in  the  cotton 
crop  which  in  Tennessee,  Alabama,  Mississippi,  Arkansas, 
Louisiana  and  Florida  increased  from  536,000  bales  in  1833 
to  916,000  bales  in  1837.  Southern  cities  looked  forward  to 
a  continuance  of  the  great  prosperity.  At  Mobile,  for  ex- 
ample, the  assessed  valuation  of  real  estate  increased  from 
$4,000,000  in  1834  to  $27,000,000  in  1837,  although  the  num- 
ber of  polls  assessed  in  the  latter  year  was  less  than  in  the 
former." 

In  1846  cotton  reached  a  very  high  point,  causing  specula- 
tion in  that  commodity  in  England,  resulting  in  a  panic.  In 
the  depression  of  1847,  which  followed,  so  great  was  the  dif- 
ficulty in  realizing  money,  even  on  cotton,  that  extensive 
shipments  were  made  on  very  limited  advancements.  In  a 
review  of  the  situation  in  1847-48  the  New  Orleans  Price 
Current  said :  "Seldom,  if  ever,  within  the  period  of  its  his- 


390  HISTORY   OF   BUSINESS   DEPRESSIONS 

tory,  as  the  leading  commercial  interest  of  our  country,  has 
the  cotton  trade  been  subjected  to  so  trying  an  ordeal  as 
that  through  which  it  has  just  passed.  The  early  prices  ob- 
tained were  satisfactory,  until  October,  when  the  commer- 
cial revolution  which  prostrated  credit  in  Great  Britain,  and 
which  spread  to  the  Continent  and  to  the  Indies,  put  a  sud- 
den check  to  our  prosperous  course  and  produced  a  more 
rapid  depreciation  of  prices  than  we  remember  ever  to  have 
witnessed." 

Before  the  panic  of  1857  cotton  went  to  nearly  14  cents, 
making  a  steady  advance  during  the  prosperous  years  pre- 
ceding and  then  falling  precipitately  with  the  crash. 

Of  the  economic  disturbances  occasioned  by  the  Civil  War 
none  was  more  trying  than  that  caused  by  the  prostration 
of  cotton  cultivation  and  the  disruption  of  the  foreign  and 
domestic  cotton  trade.  Our  Civil  War  created  the  famous 
cotton  famine  in  Europe,  causing  severe  depression  among 
her  manufacturers.  The  rebellious  southern  states  thought 
the  business  stagnation  in  England  and  France  would  be  so 
bad  that  they  would  intervene  in  the  Civil  War.  It  was  the 
opinion  of  some  that  it  was  entirely  improbable  that  the 
Confederate  States  would  ever  have  seceded  had  they  not 
felt  that  Europe's  dependence  on  American  cotton  would 
bring  intervention  in  their  behalf. 

The  South  had  high  ideas  of  its  importance,  as  shown  by 
a  speech  by  Senator  Hammond  in  1858.  "Without  firing  a 
gun,  without  drawing  a  sword,  should  they  make  war  on  us, 
we  could  bring  the  whole  world  to  our  feet.  What  would 
happen  if  no  cotton  was  furnished  for  three  years?  I  will 
not  stop  to  depict  what  every  one  can  imagine,  but  this  is 
certain,  England  would  topple  headlong,  and  carry  the  whole 
civilized  world  with  her.  No,  you  dare  not  make  war  on 
cotton.  No  Power  on  the  earth  dares  to  make  war  on  it — 
cotton  is  king." 

Charles  Francis  Adams,  whose  father  was  minister  to 
England  during  the  Civil  War,  says:  "The  European  cot- 
ton famine  of  1861-63,  at  the  time  a  very  momentous  affair, 


HISTORY   OF  BUSINESS  DEPRESSIONS  391 

is  now  forgotten ;  yet  upon  it  hung  the  fate  of  the  American 
Union."  The  story  of  that  Lancashire  Cotton  Famine  of 
1861  to  1864  has  never  been  adequately  told  in  connection 
with  our  Civil  War. 

Mrs.  Jefferson  Davis  wrote  in  her  biography :  "The  Pres- 
ident and  his  advisers  looked  to  the  stringency  of  the  Eng- 
lish cotton  market,  and  the  suspension  of  the  manufactories, 
to  send  up  a  ground  swell  from  the  English  operatives  that 
would  compel  recognition." 

The  famine  caused  the  price  to  be  quoted  at  $1.80  per 
pound  on  the  New  York  market,  but  after  the  war  planting 
was  resumed  and  good  prices  were  had.  But  the  trade  again 
felt  the  decline  and  depression  in  the  year  1869. 

Cotton  was  fortunate  in  the  depression  of  1873  because 
of  small  stocks  at  the  close  of  1872  and  decreased  produc- 
tion in  1873,  but  along  with  other  commodities,  it  was  de- 
pressed in  1879. 

During  the  eighties  prices  on  raw  cotton  were  maintained 
with  remarkable  uniformity,  although  during  the  short 
business  depression  of  1884  there  was  an  accumulation  of 
manufactured  goods,  the  supply  being  temporarily  in  excess 
of  the  demand.  In  1893  cotton  proved  to  be  a  splendid 
barometer  of  conditions.  There  was  a  short  crop  both  in 
1892  and  1893,  and  under  the  law  of  supply  and  demand 
there  should  have  been  much  higher  prices,  but,  instead, 
prices  advanced  only  slightly  in  this  country  as  well  as  in 
Europe.  The  business  depression  among  the  New  England 
manufacturers  caused  such  a  reduction  in  consumption  that 
we  sent  at  least  300,000  to  400,000  bales  more  to  Liverpool 
than  would  otherwise  have  been  received,  and  thereby  kept 
that  market  constantly  overstocked.  After  the  panic,  how- 
ever, the  price  went  up  and  reached  as  high  as  17.25  cents 
in  1904. 

During  the  depression  of  1914,  incident  to  the  outbreak  of 
the  war,  cotton  led  the  way  through  it  all.  It  was  first  to 
lead  the  way  down  and  first  to  lead  the  way  up.  At  the  out- 
break of  the  war  cotton  was  greatly  depressed  and  proposals 


392  HISTORY  OF  BUSINESS  DEPRESSIONS 

for  relief  were  outlined  by  Festus  J.  Wade,  of  St.  Louis, 
which  helped  to  take  a  large  amount  of  surplus  cotton  off 
the  market.  A  full  account  of  the  cotton  loan  plan  of  that 
time  was  published  in  the  first  annual  report  of  the  Federal 
Reserve  Board  January  15,  1915. 

In  the  Fall  of  1921,  when  it  was  apparent  that  curtailed 
acreage  and  bad  weather  conditions  would  reduce  the  year's 
crop  probably  50  per  cent,  cotton  markets  of  Liverpool,  New 
York  and  New  Orleans  were  scenes  of  wild  buying,  raising 
the  price  from  around  12  cents  to  around  20  cents  a  pound, 
an  increase  of  80  per  cent  in  three  weeks.  This  was  hailed 
everywhere  in  America  as  a  sign  of  improving  business,  and 
business  did  improve  in  most  sections  because  of  liquidation 
of  loans  to  the  banks  of  the  South  and  in  turn  to  the  banks 
of  the  North.  Then  again  came  evidence  of  the  influence  of 
cotton  on  the  delicate  mechanism  of  business.  Some  pre- 
dicted the  staple  would  go  to  25  or  even  30  cents,  carrying 
other  commodities  with  it  to  a  higher  plane,  and  were  pre- 
paring for  a  quick  return  to  prosperity.  But  cotton  went  no 
higher,  rather  it  lost  considerable  of  its  gain  and  likewise 
business  faltered  and  remained  only  slightly  improved,  but 
stationary. 

Never  in  the  world's  history  have  producers  enjoyed  such 
an  exalted  position  as  that  held  by  the  cotton  planters  of  the 
South  previous  to  the  last  few  decades.  People  of  Europe 
and  other  continents  had  built  great  cotton  textile  factories 
and  had  become  used  to  this  material,  and  it  seemed  at  one 
time  as  though  the  people  of  half  the  civilized  world  would 
go  unclad  were  it  not  for  cotton.  A  cotton  famine  haunted 
the  minds  of  the  foreign  manufacturers  for  years,  and  it 
was  so  important  to  America  that  it  furnished  over  half 
our  total  exports  until  the  time  of  the  Civil  War.  In  periods 
of  depression  which  have  affected  the  South  along  with  the 
rest  of  the  country,  many  times  even  more  seriously,  move- 
ments have  been  undertaken  to  curtail  the  acreage  of  cotton. 
When  times  were  hard  and  the  demand  dropped  off  over- 
production was  always  claimed,  and  the  economists  pointed 


HISTORY  OF  BUSINESS  DEPRESSIONS  393 

out  that  the  South  would  fare  much  better  if  they  grew  less 
cotton  and  more  of  other  crops. 

Another  astonishing  fact  is  that  the  world's  cotton  crop, 
of  wm'ch  just  about  three-fourths  is  produced  in  the  United 
States,  exceeds  the  value  of  the  world's  output  of  precious 
metals  by  50  per  cent.  The  value  of  eleven  years'  cotton 
crop  from  1901  to  1911,  inclusive,  was  over  $8,000,000,000, 
against  a  total  production  of  gold  and  silver  for  the  same 
period  of  $6,000,000,000.  It  is  cotton  that  gained  for  us  a 
favorable  trade  balance  three  decades  ago  and  has  main- 
tained it  ever  since. 

Such  eminent  authorities  as  Theodore  H.  Price,  W.  A.  Law 
and  others  agree  with  the  writer  that  cotton  is  the  most  ac- 
curate barometer  of  American  business  conditions. 

For  over  a  century  we  had  largely  a  monopoly  of  the  cot- 
ton trade  of  the  world  and  only  in  recent  years  have  we  had 
competition.  During  the  last  decade  Egyptian  cotton  has 
been  imported  into  this  country  to  a  considerable  extent,  so 
much  so  that  the  cotton  planters  of  Salt  River  Valley  in 
Arizona  and  the  Imperial  Valley  in  California  have  petition- 
ed Congress  for  a  high  duty  on  Egyptian  cotton  which  com- 
petes with  them.  The  striking  and  unexplained  fact  is  that 
while  Egypt,  in  close  proximity  to  Persia  and  India,  where 
the  plant  originated,  and  with  ideal  growing  conditions,  has 
developed  a  commercial  cotton  industry  only  in  the  last  fifty 
years. 

The  late  William  B.  Dana,  formerly  editor  of  the  "Com- 
mercial and  Financial  Chronicle,"  once  said  that  cotton, 
"being  practically  imperishable  and  always  convertible,  pos- 
sessed more  of  the  attributes  of  a  legal  tender  than  anything 
produced  by  human  labor  except  gold.  It  is  the  world's 
Golden  Fleece;  the  nations  are  bound  together  in  its  globe- 
encircling  web;  so  that  when  a  modern  economist  concerns 
himself  with  the  interdependence  of  nations  he  naturally 
looks  to  cotton  for  his  most  effective  illustration,  as  witness 
the  following :  'A  manufacturer  in  Manchester  strikes  a  bar- 
gain with  a  merchant  in  Louisiana  in  order  to  keep  a  bar- 


394  HISTORY  OF  BUSINESS   DEPRESSIONS 

gain  with  a  dyer  in  Germany,  and  three  or  a  much  larger 
number  of  parties  enter  into  virtual,  or  perhaps  actual,  con- 
tract, and  form  a  mutually  dependent  economic  community 
(numbering,  it  may  be,  with  the  work  people  in  the  group  of 
industries  involved,  some  millions  of  individuals) — an  eco- 
nomic entity  so  far  as  one  can  exist  which  does  not  include 
all  organized  society.'  " 

The  foregoing  figures  will  make  clear  the  following  im- 
portant facts  not  generally  understood: 

*1.  That  during  the  past  five  years  a  total  foreign  trade 
of  over  nineteen  billions  of  dollars  has  been  "cleared" 
by  the  shipment  back  and  forth  of  only  $220,577,952 
worth  of  gold  and  silver;  which  means  that  hardly 
more  than  one  per  cent  of  the  balances  arising  from 
this  enormous  commerce  have  been  settled  in  cash 
or  bullion. 

2.  That  during  the  same  five  years  the  trade  balance 
in  favor  of  the  United   States    (including  gold  and 
silver)    aggregates    $2,573,011,666,    and   that    during 
the  same  period  the  total  value  of  raw  cotton  ex- 
ported was  $2,759,447,880. 

3.  That  for  the  past  five  years  the  average  annual  bal- 
ance of  trade  in  favor  of  the  United  States   (includ- 
ing gold  and  silver)  has  been  $514,602,333,  and  that 
the  average   value  of  the  raw  cotton   exported  has 
been  $551,889,576. 

The  sequence  of  these  statements  will  make  it  plain  that 
our  annual  payments  in  merchandise,  gold,  and  silver  to  for- 
eign countries  exceed  their  payments  to  us  in  kind  by  $514,- 
602,333,  and  that  since  the  value  of  our  cotton  exports  ex- 
ceeds this  sum  it  is  accurate  to  say  that  "our  debts  are  paid 
in  cotton." 

Those  who  have  studied  the  subject  closely  estimate  that 
this  annual  balance  in  our  favor  of,  say  $500,000,000,  is  ap- 
plied to  the  liquidation  of  the  following  debits : 

Interest  at  five  per  cent  in  a  principal  of 
$4,000,000,000,  being  the  normal  value  of 
American  stocks,  bonds,  and  other  evi- 
dences of  American  debt  held  abroad $200,000,000 


Theodore  H.  Price  in  the  Outlook:     New  York,  Sept.  9,  1914. 


HISTORY  OF  BUSINESS  DEPRESSIONS  395 

Spent  in  Europe  annually  by  Americans 

resident  or  traveling  abroad 100,000,000 

Remitted  out  of  their  earnings  by  Europeans 

resident  in  America 100,000,000 

Insurance  and   freights 100,000,000 


$500,000,000 

These  figures  are,  of  course,  conjectural,  but  it  is  evident 
that,  if  any  of  the  items  are  underestimated,  American  in- 
debtedness abroad  unpaid  must  be  increased  by  the  amount 
of  such  underestimate,  for  our  payments  cannot  exceed  the 
net  balance  of  trade  in  our  favor,  known  and  ascertained  to 
be  about  $500,000,000  a  year. 


OOiHOJi-IOSt-OOOCOiCO 


CHAPTER  XXXVIII 

WHY  COTTON  IS  A  BETTER  BAROMETER  THAN 
PIG-IRON 

A  college  professor  and  a  business  man  were  recently 
talking  about  business  cycles.  The  professor  was  purely 
theoretical  and  he  was  asking  the  business  man  why  busi- 
ness could  not  foretell  the  coming  of  a  depression  by  watch- 
ing the  pig-iron  barometer.  The  business  man  replied  that 
the  machinery  of  statistics  worked  very  slowly,  and  before 
they  could  be  gathered  and  published  they  would  be  tardy. 
That  is  one  of  the  reasons  why  cotton  is  a  better  barometer. 
It  is  reflected  on  the  ticker  from  three  important  centers 
every  minute  of  the  day,  and  not  only  can  the  fingers  be 
kept  on  the  pulse  of  the  present,  but  the  future  is  always 
reliably  predicted  by  such  agencies  as  the  futures  market 
and  the  usually  reliable  forecasts  promulgated  by  the  De- 
partment of  Agriculture.  In  cotton  we  have  before  us  in 
dependable  figures  the  past,  present  and  future,  but  in  pig- 
iron  we  have  nothing  to  go  by  except  the  past,  and  then  it  is 
always  too  late. 

Cotton  has  three  pulse  centers,  one  checking  another — 
Liverpool,  New  York  and  New  Orleans.  It  is  on  these  great 
exchanges  that  cotton  buyers  and  sellers  concentrate  their 
judgment  on  the  future  supply  and  demand,  one  in  the  cen- 
ter of  the  foreign  markets,  another  in  the  world's  financial 
center,  and  the  third  in  the  heart  of  the  producing  section. 
When  the  speculative  markets  are  affected  abnormally  by 
manipultation  or  other  reasons,  the  spot  prices  in  the  grow- 
ing market  may  become  the  real  gauge  of  cotton  values. 

Our  production  of  iron  during  the  first  fifty  years  of  the 
Nineteenth  Century  was  comparatively  an  unimportant  fac- 
tor in  the  world's  output,  yet  during  all  this  time  cotton  was 
one  of  our  principal  products  of  domestic  consumption  and 


398  HISTORY   OF   BUSINESS   DEPRESSIONS 

had  become  established  as  a  recognized  barometer  of  our 
trade  conditions. 

It  is  indisputable  that  natural  conditions,  such  as  crop 
failures  or  large  surplus,  affect  business  conditions.  There- 
fore a  commodity  that  will  reflect  natural  conditions,  as  well 
as  speculative  conditions,  is  the  best  to  watch.  How  can 
pig-iron  production  foretell  crop  conditions  ?  It  may  reflect 
it,  but  it  cannot  foretell  it.  What  the  business  man  wants 
is  a  barometer  that  will  guide  him  before  events  happen 
rather  than  after  they  have  happened. 

Cotton  stands  today  in  about  the  same  relative  import- 
ance that  it  did  previous  to  the  Civil  War.  At  that  time 
the  Report  on  Commerce  and  Navigation  for  the  year  end- 
ing June  30,  1859,  showed  that  of  all  products  of  the  forest 
and  of  agriculture  the  North  exported  goods  to  the  value  of 
$45,305,541,  as  against  $193,399,618  from  the  South,  of 
which  $161,434,923  must  be  set  to  the  credit  of  cotton. 
Tested  from  the  standpoint  of  national  manufactures,  re- 
gardless of  exportation,  cotton  shows  a  similar  striking  im- 
portance. Its  value  as  a  manufactured  product  in  1860  was 
$115,681,774,  as  against  $73,454,000  for  wool,  and  an  almost 
equal  amount  for  forged,  rolled,  wrought,  and  cast  iron 
taken  together. 

Cotton  reflects  both  speculative  and  legitimate  trade,  and 
as  long  as  speculation  affects  business,  as  it  admittedly  does, 
cotton  will  be  the  best  barometer  to  go  by  for  all  purposes. 
There  is  no  futures  market  in  pig-iron,  so  that  commodity 
cannot  possibly  foretell  what  is  expected  to  happen,  with  any 
degree  of  accuracy.  Cotton  reflects  agricultural  conditions 
as  well  as  manufacturing  conditions.  Adverse  conditions  at 
the  cotton-goods  mill  will  affect  the  price  on  the  farm  in  a 
single  day.  Cotton  was  the  first  to  indicate  an  approaching 
crash  before  the  crises  of  1819,  1825,  1837,  1847,  1857, 
1873,  1893,  1907,  1914  and  1920.  In  each  period,  with  the 
exception  of  1837  and  1857,  pig-iron  trailed  after  the  de- 
pression had  well  set  in.  The  price  of  pig-iron  is  controlled 
artificially  to  a  large  extent. 


HISTORY   OF   BUSINESS  DEPRESSIONS  399 

Any  commodity  whose  price  and  output  can  be  large- 
ly controlled  by  a  group  of  financiers  sitting  around  a 
table  cannot  be  a  reliable  barometer.  Does  it  not  stand  to 
reason  that  those  men  will  follow  existing  conditions  rather 
than  precede  expected  conditions?  We  did  not  hear  much 
about  iron  output  as  a  barometer  of  business  until  the  or- 
ganization of  the  United  States  Steel  Corporation,  and  the 
propaganda  then  set  in  motion  that  it  was  the  best  barome- 
ter of  business  conditions  has  been  a  mighty  good  advertise- 
ment for  Steel  Corporation  stock. 

A  chart  of  cotton  fluctuations  show  how  delicately  cotton 
is  affected  by  general  conditions.  In  the  good  times  pre- 
ceding the  New  York  financial  panic  of  1903  cotton  was  car- 
ried to  a  17  cent  basis,  only  to  drop  precipitately  with  the  fi- 
nancial difficulties.  What  other  general  commodity  could 
have  been  so  quickly  affected  by  a  disturbance  in  the  finan- 
cial center?  Take  the  situation  in  1907,  quoting  Henry 
Clews :  "The  partial  recovery  in  the  stock  market  and  the 
gradual  return  of  confidence  were  coincident  with  and  in  the 
face  of  a  rising  market  for  cotton.  There  was  an  advance 
in  middling  cotton  to  131/2  cents  a  pound,  the  highest  price 
on  record  for  thirty- two  years.  Yet  there  was  no  dearth  in 
the  supply  of  cotton,  and  no  sign  of  a  corner,  or  the  possi- 
bility of  one,  and  we  carried  over  into  the  new  crop  year, 
which  began  on  the  1st  of  September,  a  visible  supply  of 
1,200,000  bales  of  American  cotton,  making  a  world's  supply 
of  2,300,000  bales,  or  nearly  540,000  more  than  at  the  same 
time  last  year." 

According  to  the  reports  in  the  United  States  Department 
of  Commerce,  July,  1913 :  "The  value  of  cotton  exported  dur- 
ing the  fiscal  year  1912  amounted  to  $565,849,271,  or  26.1 
per  cent  of  the  total  value  of  all  articles  of  domestic  mer- 
chandise exported  during  the  year.  It  exceeded  the  amounts 
for  iron  and  steel  manufactures,  meat  and  dairy  products, 
and  breadstuffs  combined,  these  three  groups  ranking  next 
in  importance  among  articles  exported.  These  large  ex- 
ports, combined  with  the  more  than  five  million  bales  con- 


400  HISTORY  OF  BUSINESS  DEPRESSIONS 

sumed  in  domestic  manufacture,  strikingly  indicate  the  im- 
portance of  cotton  in  the  economic  affairs  of  the  nation." 

The  first  signs  of  the  depression  of  1920  came  with  the 
closing  of  the  cotton  textile  mills  in  New  England.  Follow- 
ing this  came  a  severe  slump  in  the  raw  cotton  market. 
Cotton  led  the  way  in  the  downward  movement  all  through 
the  depression,  and  thousands  of  business  men  who  followed 
the  course  of  pig-iron  will  attest  that  had  they  followed  cot- 
ton they  could  have  saved  great  sums  of  money. 

The  production  of  pig-iron  carried  far  over  into  the  de- 
pression of  1920  because  of  previous  contracts  for  domestic 
and  export  demand.  It  is  true  that  when  construction  gets 
under  way,  using  the  product  of  the  furnaces,  it  involves  the 
purchase  of  other  supplies  and  equipment,  but  by  that  time 
prosperity  is  already  upon  us  and  everybody  knows  it. 
What  business  men  require  is  an  industry  that  will  indicate 
ahead  the  trend  of  conditions  so  they  can  prepare  for  them 
and  take  advantage  of  that  knowledge.  A  great  many  of 
the  best  business  men  refused  to  believe  that  a  depression  of 
serious  proportions  was  ahead  because  pig-iron  was  keeping 
up  both  in  price  and  in  output.  When  it  was  thought  that 
the  depression  had  run  its  course  and  clamor  had  started  to 
get  things  on  an  upward  turn  an  agitation  against  the  high 
steel  prices  swept  the  country.  Business  men  and  econo- 
mists everywhere  pointed  out  that  everything  else  had  de- 
clined, many  commodities  had  gone  to  normal,  but  steel 
prices,  remaining  high,  was  holding  business  back.  Cotton 
had  come  to  be  a  pre-war  basis  before  the  first  cut  in  steel 
prices,  although  pig-iron  had  begun  to  decline  slightly  in 
both  prices  and  output.  Again  in  1921  cotton  led  the  way 
up,  followed  by  other  commodities. 

Another  point  of  importance  is  the  large  proportion  of  ex- 
ports of  cotton,  an  average  of  over  60  per  cent,  which  is  of 
itself  a  reflector.  Our  iron  and  steel  exports  are  so  insig- 
nificant in  proportion  that  they  can  not  possibly  reflect  for- 
eign conditions  and  therefore  we  must  find  a  barometer  that 


HISTORY  OF  BUSINESS  DEPRESSIONS  401 

will  reflect  all  conditions — present,  future,  natural  and  for- 
eign.    What  will  do  it  better  than  cotton  ? 

Those  who  are  earnest  in  believing  that  pig-iron  produc- 
tion is  the  best  barometer  point  out  that  practically  all  pro- 
duction depends  upon  iron,  and  that  it  is  used  in  almost 
everything  we  do,  in  the  machinery  that  makes  our  food  and 
our  clothing,  in  the  construction  of  houses  and  shelters,  in 
our  transportation,  and  in  every  element  of  human  en- 
deavor. Although  all  this  is  true,  yet  we  must  realize  that 
iron  and  its  products  will  keep;  it  does  not  wear  out  daily 
like  clothing  or  be  soon  consumed  like  food.  The  business 
of  making  it  can  halt  for  a  period,  but  the  products  of  cotton 
absolutely  must  be  replaced.  Iron  and  steel  are  not  bought 
from  day  to  day  as  an  ordinary  commodity  of  business.  It 
is  well  known  that  by  far  the  larger  portion  of  the  output 
goes  into  construction,  and  it  is  also  well  known  that  big 
construction  enterprises  are  organized,  planned,  and  financed 
at  the  end  of  the  depression  when  prices  are  low.  Contracts 
are  then  made  for  the  delivery  of  iron  or  steel  to  be  used  in 
this  construction  at  the  prevailing  low  prices.  Then,  as  soon 
as  construction  starts,  labor  is  given  employment,  money  is 
spent,  and  we  think  we  are  having  prosperity.  These  enor- 
mous orders  given  by  large  contractors  and  institutions  en- 
able the  mills  to  run  on  fair  capacity.  Then  when  the  small- 
er buyers  come  into  the  market,  thinking  they  see  pros- 
perity ahead,  they  are  forced  to  pay  the  prices  that  prevail 
on  a  rising  market.  Steel  companies  may  be  turning  out 
orders  the  same  day  which  range  in  price  as  much  as  50  per 
cent. 


CHAPTER  XXXIX 
INDICATIONS  OF  APPROACHING  DEPRESSION 

Anyone  who  would  attempt  to  give  a  formula  to  foretell 
the  exact  arrival  of  a  trade  depression  would  be  foolish  in- 
deed. However,  experience  is  a  great  teacher,  and  we 
can  gain  a  fair  idea  of  what  to  expect  in  the  future  from  the 
lessons  of  the  past.  The  average  depression  runs  in  more 
or  less  disastrous  form  for  three  years,  followed  by  three 
years  on  the  up-grade,  then  three  years  of  over-expansion 
and  speculation.  This  theory  is  not  original.  It  is  the  sum 
total  of  the  deductions  arrived  at  by  all  economists.  Who- 
ever would  bank  on  it  might  win,  and  again  he  might  have 
occasion  to  curse  the  professional  economists.  The  records 
of  agriculture  show  that  it  also  follows  along  this  line.  For 
a  few  years  planting  increases  and  greater  prosperity  re- 
sults in  a  greater  consumption,  until  finally  the  agricultural 
output  increases  beyond  the  demand  of  the  consumers.  As 
soon  as  this  point  has  been  reached,  and  a  year  of  large 
carry-over  is  faced,  prices  decline  sharply,  bringing  its 
blight  to  the  farmer  who  get  low  prices  for  his  over-produc- 
tion. He  is  usually  in  debt  and  unable  to  buy  when  depres- 
sions come.  If  there  are  any  two  features  that  coincide 
through  the  history  of  depressions  it  is  that  the  cycle  of  ag- 
ricultural depression  coincides  in  point  of  time  with  the 
period  of  business  depression  and  vice  versa.  In  this  coun- 
try agriculture  is  dependent  upon  business  and  business 
upon  agriculture.  It  is  almost  impossible  that  during  se- 
vere reaction  one  could  be  at  all  prosperous  without  the 
other. 

The  peculiarity  is  that  business  has  been  known  to  blame 
agriculture  for  its  vicissitudes,  and  agriculture  invariably 
decries  business  for  its  difficulties.  The  fact  is  they  are 
both  friends  in  need  and  should  be  friends  indeed.  Agricul- 


HISTORY   OF  BUSINESS   DEPRESSIONS  403 

ture  blames  business  for  sudden  declines  in  price  and  a 
ruinous  market,  and  business  blames  agriculture  for  its 
greed,  for  over-production  and  for  demand  for  high  prices. 

If  our  "foresight  was  as  good  as  our  hindsight"  there 
would  be  no  such  thing  as  depressions.  But  even  so,  careful 
perusal  of  existing  facts,  together  with  fair  judgment,  can 
go  a  long  way  toward  keeping  the  individual  from  being  en- 
meshed in  the  crises  and  setbacks  that  come  from  time  to 
time. 

High  interest  rates  are  always  an  indication  of  trouble 
ahead,  because  it  means  scarcity  of  money.  As  bank  re- 
serves are  depleted  the  banks  are  necessarily  less  able  to 
make  loans,  and  for  what  loans  they  do  make  they  exact 
high  rates.  It  is  also  a  certainty  that  the  man  who  borrows 
money  on  high  interest  rates  is  either  doing  so  on  flimsy  se- 
curities or  is  forced  to  do  so  by  exigencies.  In  either  case 
there  is  underlying  unsoundness.  At  this  point  the  busi- 
ness man  or  investor  should  begin  to  delve  carefully  into 
statistics,  particularly  obtaining  such  newspapers  and  pe- 
riodicals as  will  give  him  dependable  information  regarding 
bank  reserves,  discount  rates,  trend  of  stocks,  and  crop  and 
marketing  conditions  pertaining  to  such  commodities  as  cot- 
ton, wheat,  etc. 

That  1873  would  bring  a  serious  depression,  if  not  a  finan- 
cial crisis,  should  easily  have  been  foretold.  In  October, 
1872,  there  was  a  deficiency  of  more  than  $1,000,000  in  the 
bank  reserve  of  New  York  city.  This  alone  spelled  trouble 
ahead,  unless  prompt  and  sound  measures  were  taken  to 
remedy  the  situation.  It  is  true  the  bank  reserves  in  a  par- 
ticular locality  may  sometimes  be  low  without  underlying 
conditions  being  bad  generally,  but  with  low  bank  reserves 
in  the  leading  financial  centers,  coupled  with  speculation, 
crop  failures  or  numerous  other  conditions,  the  situation  is 
ominous. 

Previous  to  the  panic  of  1907  financial  reports  indicated 
unsound  conditions.  Interest  on  time  loans  had  risen  from 
6  to  7  per  cent,  and  banks  and  trust  companies  had  extended 


404  HISTORY   OF  BUSINESS   DEPRESSIONS 

their  loans  until  their  reserves  were  depleted  below  the  legal 
minimum  required.  By  watching  such  a  barometer  closely 
the  average  investor  would  have  an  opportunity  to  exercise 
caution,  because  it  was  apparent  that  the  normal  limits  of 
safety  were  being  ignored.  However,  this  crisis  was  unlike 
most  previous  crises  because  of  its  suddenness,  and  it  would 
be  a  most  extreme  pessimist  who  would  lose  faith  in  the 
country  as  a  whole  when  things  were  going  along  smoothly 
and  general  conditions  looked  as  rosy  as  they  did  in  1907. 
In  fact,  there  is  little  question  but  what  this  panic  was 
criminally  induced.  It  was  brought  on  by  financial  trans- 
actions that  year  not  entirely  within  the  law.  The  sol- 
vency of  banks  in  general  could  not  be  questioned,  because 
the  average  dividends  paid  by  national  banks  had  increased 
in  seven  years  from  3.94  per  cent  to  11.8  per  cent  in  1907. 
The  crash  came  in  October  with  the  exposure  of  personal 
speculation  on  the  part  of  officers  of  several  financial  insti- 
tutions and  industrial  corporations.  It  was  at  the  time  of 
great  crop  movement,  when  a  surplus  of  money  is  sent  to 
the  interior,  and  at  this  particular  time  New  York  banks 
were  in  no  position  to  meet  demand  payments  in  cash.  Had 
these  speculations  been  unearthed  at  a  different  time  prob- 
ably the  panic  would  have  been  averted,  but  the  special 
strain  upon  reserve  cities  at  that  time  was  more  than  they 
could  stand.  The  banks  of  England  and  Germany  raised 
their  discount  rate,  and  the  extraordinary  demand  for  money 
forced  the  rate  of  interest  on  call  loans  40  or  50  per  cent,  and 
in  some  instances  125  per  cent  was  paid  for  money  in  order 
to  save  the  borrower  from  entire  ruin. 

Professor  Johnson,  writing  in  the  Political  Science  Quar- 
terly, says:  "Crises  are  doubtless  inevitable,  for  the  con- 
ditions leading  up  to  them  could  be  prevented  only  by  a 
more  than  human  combination  of  sagacity  and  discretion. 
Panics,  however,  are  unnecessary;  they  are  almost  invari- 
ably the  products  of  remediable  defects  of  the  credit  sys- 
tem." 

During  periods  of  prosperity  the  prices  of  stocks  and 


HISTORY  OF  BUSINESS   DEPRESSIONS  405 

commodities  tend  to  rise  higher  and  higher,  "so  that  if  an 
investor  buys  at  the  beginning  of  such  a  period  the  chances 
are  that  the  market  value  of  his  principal  will  increase  as 
well  as  the  rate  of  return  upon  his  invested  capital.  On  the 
other  hand,  if  he  buys  near  the  end  of  such  a  period  he  is 
doomed  to  disappointment.  For  these  periods  of  prosper- 
ity, owing  to  the  delicate  nature  of  our  credit  system,  termi- 
nate with  startling  suddenness  by  a  precipitous  decline  in 
the  market  value  of  securities,  by  a  shrinkage  in  the  volume 
of  industry  and  business,  and  by  a  curtailment  of  profits  and 
dividends." 

In  late  years  crop  reports  of  the  United  States  Depart- 
ment of  Agriculture  have  exerted  a  widening  influence  on 
financial  matters.  Close  study  is  made  as  to  crop  condi- 
tions as  a  barometer  of  those  conditions.  It  is  well  known 
that  poor  crops  in  a  given  section  affect  the  amount  of  rail- 
road traffic.  Rich  crops  mean  heavy  freight  traffic  with 
large  earnings  for  the  railroads. 

It  may  be  taken  as  a  certainty  that  contraction  of  credit 
and  depression  will  sooner  or  later  follow  an  exorbitant  rise 
in  the  price  of  commodities  and  property,  extremely  high 
wages,  extravagance,  and  wild  speculation.  It  stands  to 
reason  that  a  halt  must  come  in  this  direction. 

Babson  gives  twelve  subjects  as  barometers  which  indi- 
cate the  tendency  of  business : 

"1.    Building  and  Real  Estate:   Including  all  New  Building 
and  Fire  Losses. 

2.  Business  Failure:    Failures,  by  number,  amount  and 

percentage. 

3.  Bank  Clearings:    Total  Bank  Clearings;  Bank  Clear- 

ings excluding  New  York. 

4.  Labor     Conditions:      Immigration     and     Emigration 

Figures. 

5.  Money    Conditions:     Money    in    Circulation;     Comp- 

troller's Reports;  Loans  of  the  Banks;  Cash  Held 
by  the  Banks;  Deposits  of  the  Banks;  Surplus 
Reserve  of  Banks. 

6.  Foreign  Trade:    Imports;  Exports,  Balance  of  Trade. 

7.  Gold  Movements:  Gold  Exports  and  Imports;  Domestic 

and  Foreign  Exchange  and  Money  Rates. 


406  HISTORY  OF  BUSINESS   DEPRESSIONS 

8.  Commodity  Prices:  Foreign  and  Domestic  Commodity 

Prices;  Production  of  Gold. 

9.  Investment    Market:     Stock    Exchange    Transactions 

and  Security  Prices;  New  Securities;  New  Corpo- 
rations Formed. 

10.  Condition  of  Crops:   Crop  Conditions  and  Other  Com- 

modity Production. 

11.  Railroad   Earnings:    Gross   and   Net   Earnings;    Idle 

Car  Figures. 

12.  Social    Conditions:     Labor    Troubles     and    Political 

Factors." 

During  the  years  1897  to  1907  the  deposits  in  national 
banks  increased  from  $1,669,000,000  to  $5,256,000,000,  while 
the  cash  reserve  increased  from  $420,281,000  to  $701,000,- 
000,  indicating  that  the  ratio  of  cash  holding  to  loans  in 
1897  amounted  to  22  per  cent,  whereas  in  1907  the  ratio  had 
fallen  to  16  per  cent.  These  figures  were  convincing  evi- 
dence of  a  slump  immediately  ahead. 

Watch  the  aggregate  percentage  of  bank  capitalization, 
capital  and  surplus,  to  the  amount  of  customers'  accounts 
sold.  While  liquidation  is  going  on  the  ratio  will  be  brought 
up,  but  when  expansion  starts  in  the  ratio  will  be  carried 
down,  and  when  down  too  low  it  is  an  absolute  certainty  that 
contraction  is  ahead,  which  in  highly  speculative  periods  is 
sure  to  mean  depression.  Of  course,  these  periods  are  some- 
times tided  over  or  postponed  by  artificial  means,  but  when 
that  is  in  evidence  it  is  all  the  more  reason  to  be  certain  that 
a  day  of  reckoning  must  come. 


CHAPTER  XL 


Statistics  will  begin  to  point  out  returning  good  times 
after  the  depression  has  run  its  course,  but  caution  must  be 
exercised,  because  it  is  a  peculiarity  of  all  depressions  that 
there  have  been  flurries  of  improvement  which  some  took 
for  a  permanent  upturn  only  to  be  followed  by  a  setback. 
This  has  been  noted  in  each  depression  and  these  false  starts 
are  often  misleading.  In  1921,  September  and  October 
showed  quite  a  spurt  in  cotton,  followed  by  pig-iron  produc- 
tion, the  two  best  barometers.  Then  cotton  declined,  and  iron 
production  likewise.  Foreign  trade  also  fell  off  after  the 
upward  movement. 

After  the  depression  has  run  its  course  for  a  while,  bright 
spots  are  found  here  and  there  where  conditions  look  good, 
and  sometimes  business  men  decieve  themselves  by  thinking 
the  country  in  general  is  coming  back  to  prosperity  at  once, 
only  to  find  that  it  was  premature.  Real  prosperity  must 
be  general.  Whoever  fails  to  look  beyond  his  immediate  lo- 
cality rnay  find  himself  facing  losses.  By  watching  the  re- 
ports of  the  Federal  Reserve  Board  and  statistics  in  the 
financial  papers  and  periodicals,  noting  carefully  to  what  ex- 
tent bank  loans  have  shrunk,  reserve  ratios  have  arisen, 
and  discount  rates  declined,  one  may  get  a  fair  idea  of  com- 
ing events.  If  these  conditions  are  favorable  more  than  likely 
it  is  only  a  question  of  time  until  an  upward  trend  is  sure 
to  start. 

Investors  and  business  men  should  not  go  ahead  until 
liquidation  has  been  completed.  It  is  almost  a  certainty 
that  a  depression  will  run  two  years  at  least,  and  most  likely 
three,  with  a  gradual  improvement  setting  in  at  the  end  of 
the  second  year.  The  average  depressions  of  the  past  bear 


408  HISTORY   OF  BUSINESS   DEPRESSIONS 

out  this  statement.  Indications  of  improvement  are  shown 
in  increased  bank  clearings,  decreased  failures,  decreased 
unemployment,  increased  bank  loans,  higher  commodity 
prices,  steadying  foreign  exchange,  reduction  in  idle  freight 
cars,  increased  railroad  earnings,  increased  building  activ- 
ity, etc.  Not  any  one  of  these  may  be  taken  as  a  sure  indi- 
cation, but  the  group  as  a  whole  is  certain  to  indicate  an  up- 
ward movement.  A  great  many  shrewd  business  men  go 
almost  entirely  on  increased  bank  loans  and  discounts.  Dur- 
ing the  depressions  reserves  accumulate,  and  when  condi- 
tions become  stabilized  bankers  begin  to  want  to  let  that 
money  out  so  as  to  earn.  Then  credit  expansion  starts. 
These  business  men  often  disregard  all  other  conditions  on 
the  theory  that  if  tremendous  sums  of  money  are  being 
loaned  by  the  banks,  it  is  going  to  get  into  circulation,  and 
then  is  the  time  to  start  preparations  to  get  their  part  of  it. 
In  the  manufacture  of  commodities,  particularly,  that  is  a 
pretty  good  barometer  to  follow. 

Certainly  no  two  business  cycles  run  exactly  the  same 
courses.  We  cannot  benefit  from  an  analysis  of  previous 
revivals  as  much  as  from  previous  depressions.  If  any- 
thing, it  is  harder  to  foretell  the  exact  coming  of  the  revival 
than  the  depression.  We  know  that  certain  conditions  are 
bound  to  bring  depression.  Just  how  soon  it  is  going  to 
break  is  the  only  thing  we  have  to  guess  at.  But  with  re- 
vivals, unforeseen  events  and  conditions  blind  us  to  the  fu- 
ture. Where  we  have  artificially  stimulated  prosperity  it 
has  been  shortlived,  as  in  the  case  of  1890,  when  an  inflated 
currency  helped  for  a  while,  but  resulted  in  a  worse  panic 
and  depression  in  1893.  Stimulated  revivals  have  been  cut 
short  because  they  were  unsound.  The  leaders  of  business 
and  finance  were  unwilling  to  underwrite  prosperity  founded 
on  such  a  basis. 

When  better  conditions  start  a  feeling  of  confidence 
spreads  rapidly.  Salesmen  come  in  from  the  road  with  in- 
creased orders,  instead  of  cancellations.  Manufacturers  and 
transportation  companies  employ  more  men.  Sometimes  it 


HISTORY   OF   BUSINESS   DEPRESSIONS  409 

starts  slow  and  there  is  a  gradual  upward  movement,  and 
again  it  comes  with  a  rush.  A  long  series  of  failures  come 
with  depression  and  stringent  money.  These  failures  not 
only  cause  loss  to  their  owners  and  stockholders,  but  to  their 
creditors,  and  must  be  written  off  and  forgotten.  In  the 
meantime,  the  bankers'  policy  of  contracting  credits  and 
liquidating  loans  has  built  up  a  higher  reserve  ratio,  en- 
abling them  under  more  favorable  conditions  to  provide 
credit  at  favorable  rates  of  interest. 

A  bank's  deposits  cannot  by  any  means  be  taken  as  a 
criterion  of  their  conditions  or  of  affairs  in  general.  Of 
course,  healthy  deposits  are  a  sign  of  activity,  but  many 
times  deposits  are  in  excess  of  what  a  bank  should  carry 
for  its  'surplus  and  also  a  large  amount  of  so-called  deposits 
are  credit  accounts  sold  by  the  banks  to  their  customers. 
These  are  mere  book  credits  and  not  actual  credits. 

Very  often  investors  and  business  men  figure  out  that 
the  harvesting  of  fall  crops,  the  turn  of  the  year,  the  com- 
ing of  spring,  the  enactment  of  certain  laws,  or  various  for- 
eign conditions  would  mean  the  return  of  prosperity  and 
put  out  their  money  accordingly,  >only  to  suffer  loss  because 
their  guess  was  wrong.  If  they  had  looked  more  into  sta- 
tistical facts  they  would  probably  have  found  that  under- 
lying conditions  were  not  right  for  a  permanent  upward 
tendency,  because  business  was  not  entirely  readjusted 
and  there  had  not  been  sufficient  liquidation. 

In  times  of  depression  banks  scrutinize  their  loans  care- 
fully, many  times  making  only  such  as  they  can  rediscount 
with  the  Federal  Reserve  Banks  and  then  squeezing  them 
all  possible.  They  are  also  liquidating  their  old  loans,  and 
as  a  revival  of  business  depends  upon  easier  credit,  it  is 
necessary  to  examine  closely  the  loan  and  discount  figures 
of  financial  institutions  of  the  country.  When  the  old  loans 
have  been  well  liquidated  then  the  banks  are  more  willing 
to  extend  further  credit.  In  other  words,  when  the  busi- 
ness man  pays  one  loan  under  difficulties  the  banker  has 
confidence  and  is  willing  to  make  further  loans. 


410  HISTORY   OF   BUSINESS   DEPRESSIONS 

Expansion  of  credit  increases  deposits.  For  instance,  a 
manufacturer  may  go  to  his  bank  to  borrow  $100,000 ;  even 
though  he  might  have  the  best  kind  of  collateral,  he  could 
not  get  the  loan  unless  he  carried  sufficient  balance  to  jus- 
tify it.  Commercial  loans  are  based  on  balances  at  a  ratio 
of  20  per  cent;  therefore  a  banker  loaning  $100,000  only 
puts  out  $80,000,  because  he  already  'has  $20,000  of  the 
borrower's  money  on  deposit  and  usually  the  loan  is  not 
all  used  at  one  time,  more  or  less  of  it  being  left  on  deposit, 
checks  against  it  sometimes  being  days  and  weeks  before 
being  debited  on  the  books  of  the  banks.  Some  banks  ad- 
mit that  as  much  as  30  per  cent  of  the  amount  of  their  loans 
is  left  on  deposit  to  be  reloaned.  Borrowers  who  do  not 
carry  sufficient  bank  balances  are  forced  to  go  to  invest- 
ment companies  who  charge  commissions  for  making  the 
loan.  The  point  is,  the  deposits  item  in  a  bank  statement 
carries  little  meaning. 

It  is  not  wise  to  watch  the  reserves  of  an  individual  bank 
or  an  individual  locality.  Of  course,  no  individual  bank  can 
reflect  general  conditions  any  more  than  could  any  indi- 
vidual locality.  Further,  reserves  are  always  low  during 
crop  moving  season  because  of  the  drain  on  the  banks  for 
money  to  take  care  of  the  harvest  needs,  particularly  in  the 
west  and  south. 

Statistics  tend  to  show  that  depressions  average  one  about 
every  nine  years,  but  the  crisis  does  not  last  more  than  one 
year,  as  a  rule,  and  business  seldom  remains  below  normal 
for  more  than  two  years,  although  good  times  may  not  set  in 
for  three  years.  But  to  say  that  there  is  any  certainty  to 
cyclical  periods  would  be  ridiculous  on  the  face  of  it.  They 
all  come  about  under  different  conditions,  they  last  for  dif- 
ferent periods  and  are  different  in  their  degrees  of  severity. 

Rising  prices,  although  not  always  infallible,  are  a  good 
barometer  of  returning  good  times.  When  prices  start  up- 
ward on  account  of  less  production  or  increased  demand, 
merchants  and  manufacturers  have  a  tendency  to  place 
future  orders  or  larger  ones.  Prices  then  stiffen  under  the 


HISTORY   OF   BUSINESS   DEPRESSIONS  411 

influence  of  recuperating  demand,  making  what  is  called  a 
firm  market.  Manufacturers  will  make  stock  ahead  on  a 
strong  market,  bankers  will  loan  more  liberally,  buyers  will 
place  orders,  feeling  that  goods  are  going  higher,  thus  con- 
fidence increases  among  all  classes.  Investors  are  more 
liberal  in  buying  stocks,  which  in  turn  strengthens  these 
stocks,  construction  of  all  kinds  starts  up  and  a  general  re- 
vival is  on. 

Our  modern  system  of  corporations,  with  large 
amounts  of  fixed  capital,  will  automatically  act  to  check 
the  seriousness  of  depressions  in  the  future.  The  time 
was  when  business  was  conducted  by  individuals  or  firms, 
and  the  individual  himself,  was  mostly  affected  by  indus- 
trial depressions.  It  was  then  a  comparatively  easy  matter 
for  a  firm  or  individual  to  withdraw  its  capital  or  such  por- 
tion as  it  could,  and  liquidate.  Business  unorganized  was 
helpless,  but  under  present  methods  of  fixed  capital  liquida- 
tion is  both  ruinous  and  undesirable.  Therefore  business, 
as  a  whole,  by  force  of  necessity,  must  get  back  of  the 
situation.  A  modern  corporation  usually  remains  in  busi- 
ness indefinitely  and  must  pay  dividends.  They  must  then 
use  every  resource  of  their  management  and  board  of  direc- 
tors to  keep  the  wheels  of  industry  going,  reducing  costs  if 
necessary,  creating  demand  by  advertising,  and  generally 
helping  to  pull  trade  out  of  depression. 

The  Department  of  Commerce  at  present  is  very  progres- 
sive and  efficient  in  gathering  statistics  of  the  greatest 
value  as  a  guide  to  business  conditions.  A  great  many  pri- 
vate corporations  now  have  statistical  departments  through 
which  they  gather  all  the  data  pertaining  to  their  own  and 
allied  industries.  They  have  at  their  finger  tips  the  entire 
history  of  their  trade  so  that  they  can  foretell  fairly  well 
in  advance  what  to  expect.  Our  governmental  departments 
should  devise  a  plan  of  issuing  brief  and  concise  bulletins 
for  the  average  business  man  who  may,  through  them,  keep 
posted  in  advance  regarding  the  different  barometers  that 
indicate  the  business  future.  In  the  past  this  information 


412  HISTORY   OF  BUSINESS   DEPRESSIONS 

has  been  too  largely  placed  in  the  hands  of  "financial  in- 
siders" who  have  been  able  to  use  it  for  their  own  profit. 

The  biggest  single  factor  in  the  return  of  prosperity  is 
the  return  of  confidence.  During  every  depression  there  is 
a  contraction  of  credit  and  mounting  reserves  which,  in  it- 
self, is  the  very  basis  of  confidence.  Then  with  natural 
and  political  conditions  right — good  crops,  peace  and  sound 
administration — prosperity  is  soon  upon  us. 


CHAPTER  XLI 
SUPPLY  AND  DEMAND 

The  archaic  law  of  supply  and  demand  does,  not  have 
as  full  bearing  on  cycles  of  depression  as  is  generally  sup- 
posed. There  is  no  scientific  reason  why  over-production 
should  cause  depression,  nor  that  under-production  or 
moderate  crop  failure  should  cause  depression.  In  refer- 
ring to  what  is  known  as  crop  failure,  let  us  not  forget  that 
we  have  never  had  a  complete  crop  failure  in  the  United 
States.*  Time  and  again  we  have  over-produced  and  car- 
ried our  surplus  in  orderly  fashion.  This  pertains  to  both 
manufactured  and  agricultural  products.  Following  over- 
production agriculture  curtails  and  should  be  able  to  do  so 
without  disturbing  the  economic  fabric.  Manufacturing 
should  and  does  ease  off,  not  by  throwing  great  numbers 
of  men  out  of  employment,  but  by  decreased  hours  or 
shorter  working  weeks.  We  do  this  constantly  in  normal 
times  in  various  industries.  If  the  buying  power  keeps  up 
curtailment  for  a  short  time  regulates  the  production. 
Over-production  has  been  wrongly  accused  by  theorists  of 
cutting  capers  in  financial  deviltry,  but  the  word  "over- 
production" has  been  much  misused,  because  statistics  re- 
peatedly prove  that  we  have  over-produced  many  times 
without  resulting  depression.  Furthermore,  it  is  a  rare 
occurrence  when  industries  and  agriculture  over-produce  at 
the  same  time.  It  is  apparent,  then,  to  any  student  of  eco- 
nomics that  over-production  can  be  curtailed  in  such  lines 
as  it  affects  without  undermining  the  financial  structure. 
The  word  "over-expansion"  is  more  descriptive,  the  extrava- 
gant use  of  the  wealth  at  hand  being  the  basis  of  the  evil. 
So  much  for  supply,  whether  long  or  short. 


*See  Tables  on  page  416. 


414  HISTORY   OF  BUSINESS   DEPRESSIONS 

Supply  and  demand,  like  salt  and  pepper,  are  old  affini- 
ties, and  like  man  and  wife  they  sometimes  do  not  get  along. 
Of  the  twain  demand  is  the  most  troublesome.  In  creating 
supply  it  is  only  natural  that  business  take  into  considera- 
tion the  demand,  but  supply  is  many  cases,  such  as  with 
crop  failure,  is  in  the  hand  of  God.  Over-production  is,  ordi- 
narily, in  control  of  man.  In  production,  therefore,  busi- 
ness has  in  sight  certain  demand.  When  eventualities  arise 
to  lessen  that  demand  then  comes  trouble.  It  is  surprising 
almost  beyond  belief,  when  one  takes  the  statistics  of  pro- 
duction both  in  agriculture  and  manufacture,  to  find  how 
evenly  the  figures  run.  Many  times  in  years  of  depression 
we  blame  over-production  when  we  have  not  over-produced 
but  have  slackened  our  demand;  a  decreased  buying  power 
brought  about  through  contraction  or  lack  of  circulating 
medium  or  through  a  deliberate  refusal  to  buy  on  the  part 
of  the  public. 

The  disaster  that  sweeps  the  country  in  periodic  cycles  is 
a  punishment  for  our  misdoings  and  a  reminder  that  pros- 
perity when  abused  must  bring  reaction. 

The  central  buffer  which  receives  the  ultimate  shocks  and 
adjusts  the  balances  is  finance,  and  it  depends  upon  the 
soundness  of  finance  when  the  strain  comes  whether  the 
law  of  supply  and  demand  can  go  its  natural  course  or  be- 
come entangled  in  the  meshes  of  speculation,  war,  inflated 
currency  and  other  direct  causes  of  depression.  At  best, 
supply  and  demand  cannot  be  more  than  a  slight  contribut- 
ing cause  to  depression. 

Business  men  may  also  be  misled  in  assuming  that  de- 
mand means  consumption.  There  is  a  vast  difference  in 
the  two.  We  saw  a  very  forceful  instance  of  that  recently, 
preceding  the  depression  of  1920.  The  stereotyped  talk  of 
every  salesman  was  "under-production,  lack  of  goods,  high 
prices."  Buyers  were  led  to  believe  that  a  shortage  existed 
in  every  line,  and  because  of  that  prices  would  go  higher. 
Counting  orders  on  file  as  demand,  it  is  true  that  the  demand 


HISTORY   OF  BUSINESS   DEPRESSIONS  415 

existed,  but  that  was  very  different  than  if  the  goods  had 
passed  into  consumption.  When  we  woke  up  with  the  de- 
pression upon  us  we  found  that  rather  than  short  stocks 
and  under-production  we  had  really  over-stocked.  Our 
splendid  army  of  salesmen  had  presumably  without  know- 
ledge aforehand,  created  a  fictitious  demand.  That  was 
only  natural.  It  is  the  old  story  of  boom  times.  It  is  easy 
to  stretch  our  imagination  when  things  look  rosy.  We  must 
not  be  placed  in  a  class  of  "easy  marks"  when  we  believe 
the  under-production  propaganda  that  appears  in  boom 
times. 

So-called  gluts  do  not  necessarily  mean  over-production, 
but  may  mean  faulty  distribution.  Gluts  do  not  frighten 
manufacturers  or  merchants.  These  are  ordinary  occur- 
rences affecting  one  commodity  and  then  another,  which 
again  proves  that  over-supply  is  not  necessarily  a  cause  for 
depressions  of  any  consequence.  We  need  some  new  words 
in  the  English  language,  and  they  should  be  terms  specifi- 
cally describing  degrees  of  stringency  or  shortage,  as  well 
as  degrees  of  glut  or  plethora.  Either  descriptive  word 
may  mean  a  lot,  on  one  hand  or  the  other.  That  is  to  say, 
there  may  be  a  slight  shortage  or  a  great  shortage,  or  a 
medium  shortage ;  likewise  a  small  glut,  a  medium  glut  or  a 
large  glut. 

George  Binney  Dibblee,  of  Oxford,  writing  in  1912,  de- 
scribed such  a  thing  as  a  depression  being  brought  about  as 
the  result  of  a  deadlock  between  buyer  and  seller.  Through 
search  of  records  up  to  Dibblee's  time  I  have  not  found  an 
example  of  the  case  in  question,  nor  does  Dibblee  mention 
one,  because  he  was  writing  theoretically.  However,  our 
depression  of  1920  gives  us  as  near  an  example  of  this  con- 
dition as  we  shall  probably  ever  have.  Here  in  America  we 
found  the  seller  stubbornly  holding  out  for  a  certain  level 
of  prices,  and  the  buyer  equally  as  stubborn  in  his  determi- 
nation to  buy  for  less,  this  situation  eventuating  into  a 
complete  general  depression.  This  does  not  mean  that  the 
recent  depression  may  be  attributable  wholly  to  the  buyers' 


416 


HISTORY  OF   BUSINESS   DEPRESSIONS 


strike,  but  it  enters  as  a  forceful  factor  and  illustrates 
clearly  that  such  a  thing  as  Dibblee  describes  is  possible. 


AVERAGE  YIELD  OF  CORN 

America  is  the  one  important  country  in  the  history  of  the  world 
that  has  never  had  a  famine  nor  even  a  serious  crop  failure.  Corn 
is  a  good  example,  being  a  universal  crop,  and  produced  in  every 
state  in  the  union.  This  table  shows  how  even  the  figures  run. 
In  some  instances  as  much  as  25  per  cent  decrease  in  shown,  but 
that  denotes  decreased  acreage  following  over-production  as  often  as 
decreased  yield. 


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Acres. 

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Bushels,  i  Cents. 

Dollars. 

Acres. 

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Bushels.  |Cents. 

Dollars. 

1849__ 





592,071 





1892— 

70,627 

23.1 

1,628,464 

39.4 

642,147 

1859 

838,793 

1893 

72,036 

22.5 

1,619,496 

36.5 

591,626 

1866— 

34,307 

25.3 

867,946 

47.4 

411,451 

1894— 

62,582 

19.4 

1,212,770 

45.7 

554,719 

1 

1867— 

32,520  |  23.6 

768,320 

57.0 

437,770 

1895— 

82,076 

26.2 

2,151,139 

25.3 

544,986 

1868— 

34,887  |  26.0 

906,527 

46.8 

424,057 

1896— 

81,027 

28.2 

2,283,875 

21.5 

491,007 

1869— 

37,103 

23.6 

874,320 

59.8 

522,551 

1897— 

80,095 

23.8 

1,902,968 

26.3 

501,073 

1869 

I 

760,945 

1898__ 

77,722 

24.8 

1,924,185 

28.7 

552,023 

] 

1899— 

82,109 

25.3 

2,078,144 

30.3 

629,210 

1870— 

38,647 

28.8 

1,094,255 

49.4 

540,520 

1899__ 

94,914 

28.1 

2,666,324 





1871— 

34,091 

29.1 

991,898 

43.4 

430,356 

1872— 

35,527 

30.8 

1,092,719 

35.3 

385,736 

1900__ 

83,321 

25.3 

2,105,103 

35.7 

751,220 

1873— 

39,197 

23.8 

932,274 

44.2 

411,961 

1901— 

91,350 

16.7 

1,522,520 

60.5 

921,556 

1874— 

41,037 

20.7 

850,148 

58.4 

496^271 

1902— 

94,044 

26.8 

2,523,648 

40.3 

1,017,017 

1903— 

88,092 

25.5 

2,244,177 

42.5 

952,869 

1875— 

44,841 

29.5 

1,321.069 

36.7 

484,675 

1904— 

92,232 

26.8 

2.467,481 

44.1 

1,087,461 

1876— 

49,033 

26.2 

1,283.828 

34.0 

436,109 

1877— 

50,369 

26.7 

1,342,558 

34.8 

467,635 

1905— 

94,011 

28.8 

2.707,994 

41.2 

1,116,697 

1878— 

51,585 

26.9 

1,388,219 

31.7 

440,281 

1906— 

96,738 

30.3 

2,927,416 

39.9 

1,166,626 

1879— 

53.085 

29.2 

1,547,902 

37.5 

680,486 

1907— 

99,931 

25.9 

2,592,320 

51.6 

1.336,901 

1879 

62,369 

28.1 

1,754,592 

1908— 

101,788 

26.2 

2,668,651 

60.6 

1,616,145 

1909 

108,771 

25.5 

2,772^376 

1880— 

62,318 

27.6 

1.717,435 

39.6 

679,714 

1909__ 

98,383 

25.9 

2,552,190 

57.9 

1.477,222 

1881__ 

64,262 

18.6 

1,194,916 

63.6 

759,482 

1882— 

65.660 

24.6 

1,617.025 

48.5 

783,867 

1910— 

104,035 

27.7 

2,886,260 

48.0 

1,384,817 

1883— 

68,302 

22.7 

1.551,067 

42.4 

658.051 

1911— 

105,825 

23.9 

2,531,488 

61.8 

1,565,258 

1884— 

69,684 

25.8 

1,795,528 

35.7 

640,736 

1912— 

107,083 

29.2 

3,124,746 

48.7 

1,520,454 

1913— 

105,820 

23.1 

2,446,988 

69.1 

1,692,092 

1885-— 

73,130 

26.5 

1,936,176 

82.8 

635.675 

1914— 

103.435 

25.8 

2,672,804 

64.4 

1,722,070 

1886— 

75,694 

22.0 

1.665,441 

36.6 

610,311 

1887— 

72,393 

20.1 

1,456,161 

44.4 

646,107 

1915— 

106,197 

28.2 

2,994,793 

57.5 

1,722,680 

1888__ 

75,673 

26.3 

1,987,790 

34.1 

677,562 

1916— 

105,296 

24.4 

2.566,927 

88.9 

2,280,729 

1889— 

78,320 

27.0 

2,112,892 

28.3 

597,919 

1917— 

116,730 

26.3 

3,065,233 

127.9 

3,920,228 

1889— 

72,088 

29.4 

2,122,328 

_____ 



1918— 

104,467 

24.0 

2,502,665 

136.5 

3,416,240 

1919— 

100,072 

28.6 

2,858,509 

134.7 

3,851,741 

1890— 

71,971 

20.7 

1,489,970 

50.6 

754,433 

1920— 

104,601 

30.9 

3,232,367 

67.7 

2,189,721 

1891— 

76,205 

27.0 

2,060,154 

40.6 

836,439 

1 

1 

NOTE. — Figures  in  bold  are  census  returns  ;  figures  in  roman  are  estimates  of  the  Depart- 
ment of  Agriculture.  Estimates  of  acres  are  obtained  by  applying  estimated  percentages  of  in- 
crease or  decrease  to  the  published  acreage  of  the  preceding  year,  except  that  a  revised  base  is 
used  for  applying  percentage  estimates  whenever  new  census  data  are  available. 


HISTORY   OF  BUSINESS   DEPRESSIONS  417 

Let  it  be  remembered  that  "trade  crisis"  and  "financial 
crisis"  are  not  the  same.  We  sometimes  have  one  without 
the  other,  although  they  both  bring  about  business  depres- 
sions. 

Abundance  of  money,  whether  gold  or  unconvertible 
paper,  means  at  any  level  of  prices  a  greater  demand  for 
goods,  regardless  of  supply.  We  witnessed  this  condition 
in  1919,  when  sugar  reached  as  high  as  twenty-five  cents 
a  pound  wholesale  in  the  face  of  unprecedented  production. 
It  is  true  that  strong  propaganda  was  carried  on  preaching 
that  a  shortage  existed,  but  large  buyers  knew  there  was 
an  ample  supply.  They  bought  in  the  face  of  it,  realizing 
the  tremendous  demand  and  anticipating  it  would  go  higher, 
or  that  they  could  work  it  off  before  the  next  crop.  Many 
other  commodities  maintained  high  prices  in  the  face  of 
abundant  supply  because  of  ample  money  and  inflated 
credits,  but  in  direct  controversy  to  the  ancient  and  gener- 
ally accepted  law  of  supply  and  demand. 


CHAPTER  XLII 
PROFITEERING 

Probably  for  the  first  time  in  our  history  profiteering  en- 
ters in  as  a  primary  cause  of  depression.  In  our  early 
periods  profiteering  in  western  lands  and  real  estate  values 
was  practiced,  although  the  word  "speculation"  might  be 
more  descriptive. 

During  the  late  war  a  wholesale  grocery  concern  had  a 
case  instituted  against  it  by  the  Department  of  Justice  for 
profiteering  dismissed  on  the  ground  that  there  was  no  such 
word  in  the  dictionary  as  "profiteering."  Another  case  of 
technicality  in  the  law.  In  their  next  issue,  Mr.  Webster's 
successors  will  probably  define  profiteer  as  "one  who  takes 
advantage  to  make  excessive  profits ;  one  who  sells  at  a  price 
beyond  reason." 

In  the  early  years  of  the  First  Century  the  people  of  Rome 
raised  such  a  complaint  against  the  high  price  of  corn  that 
Tiberius  fixed  the  retail  price.  During  a  period  of  scarcity 
the  mob  attacked  Claudius  (41-54  A.  D.)  and  threw  bread 
at  him.  To  avoid  a  recurrence  of  this  indignity,  Claudius 
adopted  every  means  to  insure  the  continuous  importation 
of  food  throughout  the  winter  months,  and  even  agreed  to 
indemnify  corn  merchants  who  suffered  loss  by  storm. 

In  the  Middle  Ages,  to  the  Jewish  money  lenders  fell 
most  of  the  scorn  against  profiteers.  In  those  days  money 
was  bartered  as  a  commodity  because  there  were  few,  if  any, 
banks  and  interest  rates  were  sometimes  extortionate.  St. 
Louis  of  France  published  an  ordinance  relative  to  the  Jews, 
the  predecessors  of  the  Lombards  in  his  dominions,  where- 
by "for  the  salvation  of  his  own  soul,  and  those  of  his  an- 
cestors, he  releases  to  all  Christians  a  third  part  of  what 
was  owing  by  them  to  the  Jews."  Louis  at  the  same  time 
took  to  himself  a  percentage  of  what  he  saved  the  people. 


HISTORY   OF   BUSINESS   DEPRESSIONS  419 

Another  historical  record  of  profiteering  is  found  in  the 
Mediaeval  Ages,  when  the  Guild  movement  swept  over 
Europe.  In  those  times  the  Guilds  sought  to  regulate  prices 
on  their  output,  each  Guild  member  being  a  small  manufac- 
turer on  his  own  account.  Penalties  of  unbelievable  severity 
were  placed  upon  any  members  who  sold  below  a  certain 
price,  and  regulations  were  often  made  restricting  the  out- 
put. Most  of  these  regulations  were  soon  given  up  because 
they  defeated  their  own  object.  When  the  price  was  set  too 
high,  as  one  historian  puts  it,  "the  people  suffered  less  by 
going  without  than  by  paying  the  high  prices."  Here  prob- 
ably was  the  first  buyers'  strike  in  retaliation  for  profiteer- 
ing. And  profiteering  destroyed  the  Guilds;  they  raised 
prices  so  high  that  in  1437  dissatisfaction  became  wide- 
spread, attracting  the  attention  of  Parliament,  and  an  act 
was  passed  prohibiting  the  making  of  rules  and  prices  unless 
submitted  to  the  Justice  of  the  Peace  for  record. 

The  preamble  of  an  act  of  Henry  VPs  reign  recites  that : 
"Masters,  wardens  and  people  of  guilds,  fraternities  and 
other  companies  corporate,  dwelling  in  diverse  parts  of  the 
realm  oft-times  by  color  of  rule  and  goverance  and  other 
terms  in  general  words  to  the  granted  and  confirmed  by 
charters  and  letters  patent,  of  diverse  kings,  made  among 
themselves  many  unlawful  and  unreasonable  ordinances,  as 
well  as  in  prices  of  wares  and  other  things  for  their  own 
singular  profit  and  to  the  common  hurt  and  damage  of  the 
people." 

Even  in  our  war  of  the  Revolution,  when  Washington's 
soldiers  were  bleeding  at  Valley  Forge,  the  profiteer  got  in 
his  despicable  work.  After  seeking  to  punish  by  fine  and 
imprisonment  persons  who  should  advance  the  price  of  com- 
modities, the  different  colonies  began  to  hold  price  conven- 
tions and  to  attempt  to  fix  prices  of  labor  and  of  commoi- 
dities. 

The  first  instance  of  a  "buyers'  strike"  against  profiteers 
in  our  country  outside  of  the  "Boston  Tea  Party,"  if  that 
might  be  called  one,  was  just  preceding  the  depression  of 


420  HISTORY   OF   BUSINESS   DEPRESSIONS 

1837,  when  popular  meetings  were  held  in  New  York  for 
the  purpose  of  protesting  against  the  high  prices  of  provi- 
sions and  the  undue  inflation  of  bank  credits.  One  of  these 
meetings,  on  February  14th,  became  riotous,  a  flour  ware- 
house was  gutted,  and  the  military  were  called  out  to  pre- 
serve order. 

De  Tocqueville,  a  foreigner  visiting  America  in  1873,  de- 
scribed us  thusly:  "An  American  clings  to  the  world's 
goods  as  if  he  were  certain  never  to  die,  and  he  is  so  hasty 
and  grasping  for  all  within  his  reach  that  one  would  sup- 
pose that  he  was  constantly  afraid  of  not  living  long  enough 
to  enjoy  them." 

Those  Americans  who  travel  know  that  this  is  our  repu- 
tation most  everywhere  today.  We  are  known  as  money- 
worshippers,  and  that  we  get  all  we  can,  without  limit. 

There  is  no  way  by  which  prices  can  be  raised  without 
its  effect  upon  those  who  do  it.  One  raise  brings  on  an- 
other as  the  commodity  and  the  money  it  brings  goes  through 
the  channels  of  trade,  and  as  we  exchange  our  money  so 
rapidly  in  this  country  it  soon  comes  back  to  us  in  the  form 
of  increased  prices  on  what  we  spend  our  money  for.  Again, 
an  orgy  of  profiteering  is  bound  to  come  back  on  us  because 
it  requires  more  capital  to  do  business  on.  It  increases  the 
risk,  less  service  is  rendered,  and  a  let-up  must  follow  be- 
cause the  currency  is  strained  to  take  care  of  the  volume  of 
business  transacted  at  high  prices,  whereas  we  could  do  the 
same  volume  with  a  greater  turnover  and  equal  profits  re- 
sulting from  the  same  amount  of  capital  involved.  In  some 
respects  corporations  are  made  the  "goats"  in  regard  to 
profiteering.  The  corporation  which  earns  15  or  20  per 
cent  on  its  capital  is  stigmatized  and  the  public  takes  it  for 
granted  that  such  a  corporation  has  underpaid  its  working 
men  and  charged  exorbitant  prices  for  its  product.  But 
the  public  forgets  that  it  is  necessary  to  put  by  a  surplus 
fund  to  take  care  of  its  preferred  stock  in  times  of  depres- 
sion. And  that  at  the  same  time  laws  are  being  constantly 
passed,  state  and  federal,  holding  them  to  be  the  legitimate 


HISTORY   OF   BUSINESS  DEPRESSIONS  421 

prey  of  the  tax  gatherer.  On  the  other  hand,  the  individual 
would  not  think  of  giving  his  investment  and  time  to  make 
such  a  small  profit.  The  big  earnings  of  a  single  business 
man  may  be  entirely  due  to  the  wisdom  and  efficiency  of  his 
management,  yet  the  corporation  which  may  serve  as  well 
and  often  cheaper  is  condemned.  It  is  not  the  object  here 
to  defend  the  profiteering  corporation.  The  profiteer  of 
every  class  is  to  be  proscribed.  His  practices  are  against 
public  interests  and  should  be  condemned,  because  unless 
he  is  checked  reaction  against  him  will  always  follow 
through  buyers'  strikes.  But  when  we  consider  the  profi- 
teer, let  us  not  always  look  for  him  in  high  places,  because 
more  often  he  will  be  found  among  the  small  shop  keepers 
and  the  every  day  individual  who  is  conducting  a  personal 
business. 

The  profiteer  plays  havoc  in  easy  times,  but  he  will 
eventually  hang  himself  unless  he  has  a  monopoly.  Huge 
profits  on  an  individual  sale  do  not  necessarily  mean  event- 
ual success,  but  rather  in  competitive  lines  more  often  spells 
failure.  We  Americans  have  a  world-wide  reputation  of 
lacking  one  quality  in  our  national  character,  and  that  is 
thrift.  As  a  rule,  as  smart  as  we  think  we  are,  very  often 
our  resourcefulness  is  limited  to  the  performance  of  raising 
prices.  The  country  swarms  with  a  motley  outfit  known  as 
"cost  experts"  who  range  over  the  nation  preaching  higher 
prices,  based  on  a  cost  system  which  they  sell  for  a  price, 
and  which  invariably  leads  to  price  raising.  Of  course, 
their  stock  in  trade,  in  order  to  sell  their  system,  is  more 
profits  for  their  customer.  But  it  is  indisputably  proved  that 
the  man  who  makes  the  outstanding  success  in  business  is 
the  one  who  serves  the  public  at  less  cost  than  others.  A 
great  many  so-called  cost  systems  lead  to  profiteering,  which 
the  public  resents,  and  thus  the  demand  for  the  commodity 
in  question  is  lessened.  What  a  demand  there  would  be  for 
cost  experts  who  would  show  us  how  to  profitably  lower 
prices  rather  than  how  to  raise  them ! 

The  most  phenomenal  business  successes  of  our  day  and 


422  HISTORY   OF   BUSINESS   DEPRESSIONS 

generation  have  been  those  men  who  got  rich  by  selling 
cheaper  than  anybody  else,  making  their  money  on  the 
volume  and  not  the  individual  sale,  as  in  the  instances  of 
Henry  Ford,  F.  W.  Woolworth,  the  ten-cent  store  man,  B.  H. 
Kroger,  owner  of  2,500  grocery  stores,  and  others.  In  re- 
cent years  profiteers  have  used  the  iabor  unions  in  milching 
the  public.  For  instance,  the  photo  engravers  entered 
into  a  contract  with  the  Photo  Engravers  Union  whereby 
a  certain  wage  scale  and  working  conditions  were  to  be 
agreed  upon,  provided  the  union  would  refuse  to  work  for 
any  concern  not  charging  a  given  scale  of  prices.  The 
bait  thrown  to  the  union  was  a  higher  wage  than  they  even 
demanded  .  In  other  words,  exorbitant  prices  were  charged 
the  public  and  a  small  portion  of  the  loot  thrown  to  the 
union.  The  result  was  immediate  decrease  in  use  of  en- 
gravings on  the  part  of  the  publishers,  advertisers  and 
others,  and  the  engravers  felt  the  depression  of  1920  before 
it  began  to  be  felt  in  most  other  lines  of  business.  Thus 
profiteering  cut  off  the  use  of  their  commodity  except  in 
absolute  necessity. 

We  think  we  have  advanced  in  our  civilization  and  our 
ethics,  but  let  us  go  back  to  1632,  where  we  will  find  the 
identical  conditions  and  the  same  practices  that  exist  today  :* 

"The  kings  most  excellent  Majestic,  taking  into  Considera- 
cion  the  manifold  evil  Practizes  which  for  private  gaine 
are  too  often  put  in  use  as  well  by  Cornmasters  and  Hoord- 
ers  of  Corne  as  by  Marchants  and  others  to  in  (sic)  In- 
hance  the  Prices  of  Corne  and  graine  to  the  generall  preju- 
dice of  all  other  his  Majesties  subjects,  especially  laboring 
men  and  those  of  the  Poorer  sorte  which  hath  appeared  not 
onely  in  the  time  of  the  late  darth,  but  in  the  yere  now  past 
(when,  by  the  goodness  of  God,  there  was  such  plentie  & 
abundance  of  Corne  as  seldome  hath  byn  greater  and  yet 
the  rates  &  prises  of  Corne  in  maine  parts  of  this  Kigdome, 
especially  in  the  Cittie  of  London  and  the  parts  neere  ad- 


*  Quoted  by  Gras — "Evolution  of  the  English  Corn  Market." 


HISTORY  OF   BUSINESS  DEPRESSIONS  423 

joyning,  wer  kept  up  a  farre  higher  prices  then  was  fitt  to 
be  in  a  time  of  so  great  and  generall  plentie.  And  that  how- 
soever by  the  Provident  and  Constant  Care  of  his  Majestic 
parts  of  his  Privie  Councell  transport  (a)  con  of  Corne  was 
restrained  even  in  the  plentiful  yere  yet  in  mainie  parts 
of  the  kindome  false  Rumors  were  and  are  spred  and  de- 
vulged  of  great  Transportacon  of  Corne  lycensed  and  au- 
throsed  to  the  great  dishonour  of  his  Majestic  and  the  State 
and  of  a  wicked  purpose  to  keep  Corne  and  garine  at  mod- 
erate Prices  His  Majestic  with  the  advice  of  his  Privie 
Councell  doth  hereby  publishe  and  declare  That  all  said 
Rumors  were  false  .  .  ." 

Similar  practices  are  in  vogue  to  this  very  day! 

In  Russia  where  the  peasant's  mind  is  not  much  given  to 
reason,  when  profiteering  is  practiced  against  him,  "his 
remedy  is  to  kill  the  nearest  Jew." 

Various  remedies  have  been  proposed  to  curb  the  practice. 
The  best  lawyers  say  there  is  no  way  under  present 
laws  to  prosecute  profiteers,  and  that  it  is  going  to  be  ex- 
tremely hard  to  enact  laws  that  will  be  constitutional.  How- 
ever, a  way  is  sure  to  be  found,  as  a  way  has  always  been 
found  to  regulate  industry  when  it  affects  public  interests. 
The  recent  profiteering  laws  passed  in  the  District  of  Colum- 
bia, New  York  and  other  states,  have  been  upheld,  and  if 
rent  profiteers  can  be  controlled  it  is  a  certainty  that  prices 
of  other  necessities  of  life  can  be  controlled.  Unless  it  is 
done  profiteering  is  going  to  enter  more  and  more  into  the 
causes  of  future  depressions.  Buyers'  strikes  are  a  flareback 
from  profiteering  and  our  experience  has  already  taught  us 
all  we  need  to  know  about  the  economic  consequences  of 
them.  When  the  manufacturer  and  merchant  is  reproached 
for  profiteering  they  immediately  accuse  labor  of  profit- 
eering equally  as  much.  But  neither  can  afford  to  be  ac- 
cused of  profiteering.  Labor  leaders  have  only  to  put  their 
ear  to  the  ground  to  find  out  if  the  public  is  with  them.  The 
labor  movement  cannot  make  headway  against  public  opin- 
ion. Labor  leaders  may  win  conflicts  occasionally  without 


424  HISTORY  OF  BUSINESS  DEPRESSIONS 

it,  but  later  they  will  lose  all  they  have  gained.  While  pub- 
lic opinion  is  with  them  they  make  permanent  and  substan- 
tial headway,  and  no  cry  is  made  of  the  labor  profiteer. 

The  growing  tendency  to  profiteer,  unless  curbed,  is  going 
to  have  the  menace  of  depression  ever  hanging  over  us. 
Moderation  in  profits  during  prosperity  will  prolong  those 
periods  but  wildly  exhorbitant  prices  are  bound  to  bring  re- 
action. 


CHAPTER  XLIII 

REPORT  OF  THE  PRESIDENT'S  UNEMPLOYMENT 
CONFERENCE 

SEPTEMBER  26 — OCTOBER  13,  1921,  WASHINGTON,  D.  C. 


DIRECTORY   OF   MEMBERSHIP 

John  B.  Andrews,  Executive  Secretary  American  Association  for 
Labor  Legislation,  131  East  Twenty-third  Street,  New  York  City — 
Member  Economic  Advisory  Committee  and  Executive  Secretary  Com- 
mittee on  Public  Hearings. 

Winslow  B.  Ayer,  President  Eastern  &  Western  Lumber  Company, 
Front  and  Twenty-first  Streets,  Portland,  Ore. — Committee  on  Con- 
structions. 

Charles  M.  Babcock,  Highway  Commissioner  of  Minnesota,  920 
Guardian  Life  Building,  St.  Paul,  Minn. — Committee  on  Public  Works. 

Julius  H.  Barnes,  President  U.  S.  Food  Administration  Grain 
Corporation,  1917  to  1919;  U.  S.  Wheat  Director;  Chairman  Institute 
for  Public  Service,  42  Broadway,  New  York  City — Committee  on  Or- 
ganization, Room  713;  Chairman  Committee  on  Employment  Agencies 
and  Registration,  Committee  on  Civic  Emergency  Measures,  Commit- 
tee on  Foreign  Trade. 

George  E.  Barnett,  Professor  of  Statistics,  John  Hopkins  Uni- 
versity, 827  Park  Avenue,  Baltimore — Economic  Advisory  Committee. 

Ernest  S.  Bradford,  Statistician,  Argyll  Avenue,  New  Rochelle, 
N.  Y. — Economic  Advisory  Committee. 

Wm.  S.  Brown,  President  National  Marine  Engineers  Association, 
313  Machinists  Building,  Washington — Committee  on  Shipping. 

W.  L.  Burdick,  North  Dakota  Agriculturist — Committee  on  Sta- 
tistics, Committee  on  Agriculture. 

Bailey  B.  Burritt,  Executive  Secretary  Association  for  Improving 
the  Condition  of  the  Poor,  105  East  Twenty-second  Street,  New  York 
City — Economic  Advisory  Committee. 

William  M.  Butler,  President  Butler  Mills,  New  Bedford  Cotton 
Mills,  Hoosac  Cotton  Mills,  77  Franklin  Street,  Boston,  Mass. — Com- 
mittee on  Manufacturers,  Committee  on  Foreign  Trade. 

James  A.  Campbell,  President  of  the  Youngstown  Sheet  &  Tube 
Company,  Youngstown,  Ohio — Committee  on  Statistics,  Chairman 
Committee  on  Manufacturers. 

W.  S.  Carterm,  President  of  the  Brotherhood  of  Locomotive  Fire- 
men and  Enginemen,  901  Guardian  Building,  Cleveland,  Ohio — Com- 
mittee on  Transportation. 


426  HISTORY   OF  BUSINESS   DEPRESSIONS 

Elizabeth  Christian,  Secretary  International  Glove  Workers' 
Union;  Secretary-Treasurer  National  Women's  Trade  Union  League, 
311  South  Ashland  Boulevard,  Chicago,  111. — Committee  on  Registra- 
tion and  Employment  Agencies,  Committee  on  Civic  Emergency 
Measures. 

Edgar  E.  Clark,  Ex-President  Order  of  Railway  Conductors; 
member  Roosevelt  Anthracite  Commission  1902;  formerly  chairman 
Interstate  Commerce  Commission,  American  Bank  Building — Chair- 
man Committee  on  Transportation,  Washington,  D.  C. 

Bird  S.  Coler,  Commissioner  of  Public  Welfare;  Chairman  of  the 
Industrial  Aid  Bureau,  New  York  City — Committee  on  Employment 
Agencies  and  Registration,  Committee  on  Public  Works,  and  Com- 
mittee on  Emergency  Civic  Measures. 

Mrs.  Sara  A.  Connery,  Secretary  of  the  United  Textile  Workers 
of  America,  Bible  House,  New  York  City — 'Committee  on  Manu- 
facturers. 

John  T.  Connery,  President  Miami  Coal  Co.,  332  Michigan  Avenue, 
Chicago,  111. — Committee  on  Mining. 

Mayor  James  Couzens,  President  of  the  Detroit  Board  of  Com- 
merce; former  Vice-President  Ford  Motor  Car  Co.;  Mayor  since  1919. 
Address,  Dime  Bank  Building,  Detroit,  Mich. — Committee  on  Organi- 
zation, Committee  on  Statistics,  Committee  on  Civic  Emergency 
Measures,  Committee  on  Public  Works. 

Joseph  H.  Defrees,  President  Chamber  of  Commerce  of  the 
United  States,  Mills  Building — Committee  on  Organization,  Commit- 
tee on  Employment  Agencies  and  Registration,  chairman  Committee 
on  Foreign  Trade,  Washington,  D.  C. 

Henry  S.  Dennison,  President  Dennison  Manufacturing  Co.,  Fram- 
ingham,  Mass. — Economic  Advisory  Committee,  Committee  on  Manu- 
facturers. 

Davis  R.  Dewey,  Professor  of  Economics  and  Statistics,  Massa- 
chusetts Institute  of  Technology,  2  Berkeley  Street,  Cambridge, 
Mass. — Economic  Advisory  Committee. 

Major  Roy  Dickinson,  Editor  Printers  Ink,  East  Orange,  N.  J.; 
formerly  Chief  Industrial  Morale  Section,  Office  Chief  of  Staff,  U.  S. 
A. — Committee  on  Manufacturers. 

John  Donlin,  President  Building  Trade  Department  American 
Federation  of  Labor,  Washington,  D.  C. — Committee  on  Constructions. 

Carroll  W.  Doten,  Professor  of  Economics,  Massachusetts  Insti- 
tute of  Technology,  222  Charles  River  Road,  Cambridge,  Mass. — 
Economic  Advisory  Committee. 

John  E.  Edgerton,  President  Lebanon  Woolen  Mills;  Fuel  Ad- 
ministration of  Tennessee;  Chairman  War  Resources  Committee  for 
Tennessee  and  United  War  Work  Campaign;  President  National  Man- 
ufacturers' Association,  50  Church  Street,  'New  York  City — Committee 
on  Manufacturers. 

John  H.  Fahey,  40  Court  Street,  Boston,  Mass.,  former  President 
U.  S.  Chamber  of  Commerce — Committee  on  Foreign  Trade. 


HISTORY   OF   BUSINESS   DEPRESSIONS  427 

W.  F.  Field,  President  Pittsburg  Coal  Company,  Oliver  Building, 
Pittsburg,  Pa. — Committee  on  Mining. 

Mortime  Fleishhacker,  Chairman  of  the  Labor  Mediation  Board 
of  the  Pacific  Coast  during  the  war;  President  Anglo-California 
Trust  Co.,  Sansome  and  Market  Streets,  San  Francisco,  Calif. — Com- 
mittee on  Employment  Agencies  and  Registration. 

P.  A.  S.  Franklin,  President  International  Mercantile  Marine,  9 
Broadway,  New  York  City — Committee  on  Shipping. 

Edwin  F.  Gay,  President  New  York  Evening  Post,  New  York 
City,  formerly  Dean  Graduate  School  of  Business  Administration, 
Harvard  University — Economic  Advisory  Committee. 

James  S.  Gibson,  President  Waterfront  Employers'  Union,  1220 
Post  Street,  Seattle,  Wash. — Committee  on  Shipping. 

Samuel  Gompers,  President  American  Federation  of  Labor, 
Washington,  D.  C. — 'Committee  on  Manufacturers. 

E.  S.  Greff,  Chief  of  the  Transportation  Division,  Department  of 
Commerce,  Alternative  Executive  Secretary  with  R.  A.  Lunquist  on 
Committee  on  Shipping. 

John  M.  Gries,  Chief  of  the  Division  of  Building  and  Housing, 
Department  of  Commerce — Executive  Secretary  Committee  on  Con- 
struction. 

A.  F.  Haines,  Vice-President  Pacific  Steamship  Co.,  112  Market 
Street,  San  Francisco,  Calif.;  Waldorf-Astoria,  New  York  City — 
Committee  on  Shipping. 

Salmon  P.  Halle,  President  National  Council  of  Retail  Associa- 
tions. Address,  Halle  Bros.  Co.,  1226  Euclid  Avenue,  Cleveland  Ohio — 
Committee  Civic  Emergency  Measures. 

George  Edmond  Haynes,  Member  Commission  on  Race  Relations 
of  the  Federal  Council  of  the  Churches  of  Christ;  formerly  Director 
of  Division  of  Negro  Economics,  U.  S.  Department  of  Labor,  1716  T. 
Street,  N.  W. — Member  'Committee  on  Civic  Emergency  Measures. 

Clarence  J.  Hicks,  Executive  Assistant  to  President  of  the  Colo- 
rado Fuel  &  Iron  Co.;  Executive  Assistant  to  President  of  the  Stand- 
ard Oil  Company,  26  Broadway,  New  York  City — Committee  on  Em- 
ployment Agencies  and  Registration,  Committee  on  Manufacturers. 

Dr.  Thomas  P.  Hinman,  President  Hand  Trading  Company,  Pel- 
ham,  Ga.;  President  Farmers  Bank,  Pelham,  Ga.;  President  Pelham 
Phosphate  Co.;  President  Pelham  Oil  &  Trust  Company — Committee 
on  Manufacturers. 

A.  L.  Humphrey,  President  and  Director  of  Westinghouse  Air 
Brake  Co.,  Pittsburg,  Pa.;  Industrial  Inspector  of  Ordnance  Depart- 
ment during  War;  Member  Fuel  Commission,  State  of  Pennsylvania; 
Vice-President  National  Council  for  Defense;  Director  National  Cham- 
ber of  Commerce — Committee  on  Manufacturers. 

Edward  Eyre  Hunt,  engineer,  New  York  City,  Secretary  of  the 
Conference  on  Unemployment  and  Executive  Secretary  Committee 
on  Organization. 


428  HISTORY   OF  BUSINESS   DEPRESSIONS 

Jackson  Johnson,  Chairman  of  the  International  Shoe  Co.;  Presi- 
dent of  St.  Louis  Chamber  of  Commerce,  Fifteenth  Street  and  Wash- 
ington Avenue,  St.  Louis,  Mo. — Committee  on  Employment  Agencies 
and  Registration,  Committee  on  Manufacturers. 

Clyde  L.  King,  Professor  of  Political  Science,  University  of  Penn- 
sylvania, Philadelphia;  R.  F.  D.  3,  Media,  Pa. — Economic  Advisory 
Committee,  Executive  Secretary  Committee  on  Agriculture. 

Gordan  Lee,  Chief  of  the  Automotive  Division,  Department  of 
Commerce — Executive  Secretary  Committee  on  Manufacturers. 

John  H.  Kirby,  President  of  the  Kirby  Lumber  Company,  Houston, 
Tex. — Committee  on  Construction. 

William  M.  Leiserson,  Impartial  Chairman  Men's  and  Boys' 
Clothing  Industry,  Rochester  and  New  York  City — Executive  Secre- 
tary Committee  on  Employment  Agencies  and  Registration,  Com- 
mittee on  Civic  Emergency  Measures,  Committee  on  Publications. 

John  L.  Lewis,  President  United  Mine  Workers  of  America,  Mer- 
chants Bank  Building,  Indianapolis,  Ind. — Committee  on  Mining. 

Samuel  A.  Lewisohn,  of  Samuel  A.  Lewisohn  &  Sons,  61  Broad- 
way, New  York  City — Economic  Advisory  Committee  and  Committee 
on  Mining. 

Samuel  McCune  Lindsay,  Professor  of  School  Legislation,  Colum- 
bia University,  New  York  City — Economic  Advisory  Committee  and 
Chairman  Committee  on  Public  Hearings;  Committee  on  Organiza- 
tion, Committee  on  Publications. 

Bascom  Little,  7711  Euclid  Avenue,  Cincinnati,  Ohio — Committee 
on  Construction,  Committee  on  Civic  Measures,  and  Committee  on 
Public  Works. 

Otto  T.  Mallery,  Member  Pennsylvania  State  Industrial  Board, 
Philadelphia,  Pa. — Economic  Advisory  Committee  and  Executive  Sec- 
retary Committee  on  Public  Works. 

C.  E.  Markham,  President  of  the  Illinois  Central  Railroad  Co., 
Chicago,  111. — Committee  on  Organization,  Committee  on  Statistics, 
and  Committee  on  Transportation. 

Gen.  R.  C.  Marshall,  Jr.,  formerly  Chief  of  the  Construction 
Division  of  the  Army;  General  Manager  Society  of  the  General  Con- 
tractors of  America,  1039  Munsey  Building,  Washington,  D.  C. — Com- 
mittee on  Public  Works,  Chairman  Committee  on  Construction. 

George  H.  McFadden,  121  Chestnut  Street,  Philadelphia,  Pa.— 
Committee  on  Foreign  Trade. 

T.  W.  Mitchell,  Engineer,  Philadelphia — Statistician  to  the  Eco- 
nomic Advisory  Committee  and  Executive  Secretary  Committee  on 
Statistics. 

Wesley  C.  Mitchell,  Professor  of  Economics,  New  School  for  So- 
cial Research,  465  West  Twenty-third  Street,  New  York  City — Mem- 
ber Economic  Advisory  Committee,  Committee  on  Statistics. 

Charles  P.  Neill,  former  U.  S.  Commissioner  of  Labor  Statistics; 
Umpire  Anthracite  Conciliation  Board;  Manager  Bureau  of  Informa- 
tion of  Southeastern  Railways,  Woodward  Building,  Washington,  D.  C. 
— Executive  Secretary  Committee  on  Transportation,  Committee  on 
Civic  Emergency  Measures. 


HISTORY   OF   BUSINESS   DEPRESSIONS  429 

Thomas  V.  O'Connor,  President  Longshoremen's  Union;  Member 
of  U.  S.  Shipping  Board — Committee  on  Organization,  Chairman  Com- 
mittee on  Shipping. 

Paul  A.  Palmerton,  Chief  of  the  Rubber  Division,  Department  of 
Commerce — Executive  Secretary  Committee  on  Foreign  Trade. 

Raymond  A.  Pearson,  President  Iowa  State  College  of"  Agricul- 
ture, Ames,  Iowa;  Ex-Assistant  Secretary  of  Agriculture — Committee 
on  Transportation,  and  Chairman  Committee  on  Agriculture. 

John  A.  Penton,  Publisher  Iron  Trade  Review,  1136  Chestnut 
Avenue,  Cleveland,  Ohio — Committee  on  Manufacturers. 

Andrew  J.  Peters,  former  Member  of  Congress;  former  Assistant 
Secretary  of  the  Treasury;  former  Mayor,  Boston,  Mass. — Committee 
on  Civic  Emergency  Measures,  Chairman  Committee  on  Public  Works. 

E.  M.  Poston,  President  of  the  New  York  Coal  Co.,  8  East  Broad 
Street,  Columbus,  Ohio — Committee  on  Mining. 

W.  C.  Proctor,  President  Proctor  &  Gamble,  Cincinnati,  O. — 
Committee  on  Manufacturers. 

Capt.  John  H.  Pruett,  President  National  Organization  of  Masters, 
Mates  and  Pilots  of  America,  423  Forty-ninth  Street,  Brooklyn,  N.  Y. 
City — Committee  on  Shipping. 

H.  H.  Raymond,  President  American  Steamship  Owners  Associa- 
tions, Pier  36,  North  River,  New  York  City — Committee  on  Shipping. 

William  M.  Ritter,  Wm.  M.  Ritter  Lumber  Co.,  Columbus,  Ohio — 
Committee  on  Construction. 

Henry  M.  Robinson,  Member  Second  Industrial  Conference;  Chair- 
man of  the  Bituminous  Coal  Commission  1920;  President  Los  Angeles 
Trust  Company,  Los  Angeles,  Calif. — Chairman  Committee  on  Or- 
ganization and  Chairman  Committee  on  Statistics. 

R.  H.  M.  Robinson,  Vice-President  United  American  Lines,  39 
Broad,  New  York  City — Committee  on  Shipping. 

William  S.  Rossiter,  formerly  Chief  U.  S.  Census;  President  of 
the  Rumford  Press,  Concord,  N.  H. — Chairman  of  Economic  Advisory 
Committee. 

John  D.  Ryan,  Director  Aircraft  Production  1918;  President  of 
the  United  Metals  Selling  Company — Chairman  Committee  on  Mining. 

Charles  M.  Schwab,  Chairman  Bethlehem  Steel  Corporation;  Di- 
rector General  of  Shipbuilding,  United  States  Shipping  Board  Emer- 
gency Fleet  Corporation  1918,  111  Broadway,  New  York  City — Com- 
mittee on  Organization,  Committee  on  Manufacturers  and  Committee 
on  Shipping. 

Henry  R.  Seager,  Professor  of  Economics,  Columbia  University, 
New  York,  N.  Y. — Economic  Advisory  Committee. 

Edwin  R.  A.  Seligman,  Professor  of  Economics,  Columbia  Uni- 
versity, New  York  City — Economic  Advisory  Committee. 

W.  H.  Stackhouse,  President  National  Implement  &  Vehicle  As- 
sociation, Springfield,  Ohio — Chairman  Committee  on  Manufacturers. 


430  HISTORY   OF   BUSINESS   DEPRESSIONS 

Benjamin  Strong,  Governor  of  Federal  Reserve  Bank  of  New 
York,  15  Nassau  Street,  New  York  City — Committee  on  Foreign 
Trade. 

Ida  M.  Tarbell,  132  East  Nineteenth  Street,  New  York  City- 
Committee  on  Organization,  Committee  on  Public  Works,  Committee 
on  Civic  Emergency  Measures,  Committee  on  Publications. 

M.  F.  Tighe,  President  of  the  Amalgamated  Association  of  Iron, 
Steel  and  Tin  Works,  House  Building,  Pittsburg,  Pa. — Committee  on 
Constructions,  Committee  on  Manufacturers. 

Ernest  T.  Trigg,  Member  First  Industrial  Conference,  Vice- 
President  and  General  Manager  of  John  Lucas  &  Co.,  Drexel  Bldg., 
Philadelphia,  Pa. — Committee  on  Construction,  Committee  on  Public 
Works,  Committee  on  Organization. 

Miss  Mary  Van  Kleeck,  Director  Women  in  Industry  Service, 
U.  S.  Department  of  Labor,  1918-1919;  Director  of  Industrial  Studies 
Russell  Sage  Foundation,  130  East  Twenty-second  Street,  New  York 
City — Committee  on  Mining,  Committee  on  Statistics,  Committee  on 
Civic  Emergency  Measures,  Chairman  Committee  on  Publications. 

John  P.  White,  United  Mine  Workers  of  America,  1102  Merchants 
Bank  Building,  Indianapolis,  Ind. — Committee  on  Mining. 

Walter  F.  Willcox,  Professor  of  Economics  and  Statistics,  Cornell 
University,  Ithaca,  N.  Y. — Economic  Advisory  Committee,  Committee 
on  Statistics. 

John  B.  Williams,  General  Manager  First  National  Pictures  Corp- 
oration, New  York  City. 

Matthew  Well,  President  International  Photo  Engravers  Union 
of  North  American  Federation  of  Labor,  6111  South  Bishop  Street, 
Chicago,  111. — Committee  on  Organization,  Committee  on  Statistics, 
Committee  on  Public  Works,  and  Committee  on  Civic  Emergency 
Measures. 

Leo  Wolman,  New  School  for  Social  Research — Economic  Advisory 
Committee. 

Col.  Arthur  Woods,  former  Police  Commissioner  of  New  York, 
Assistant  to  Secretary  of  War  in  Charge  of  Re-establishment  of 
Service  Men  in  Civil  Life,  1919,  32  East  Thirty-second  Street,  New 
York  City — Committee  on  Public  Works,  Room  705,  and  Chairman 
Committee  on  Civic  Emergency  Measures. 

Evans  Wollen,  Member  Economic  Policy  Committee  of  the  Ameri- 
can Bankers'  Association;  President  of  the  Fletcher  Joint  Stock  Land 
Bank,  Indianapolis,  Ind. — Committee  on  Public  Works. 

Allyn  A.  Young,  Harvard  University,  Cambridge,  Mass.,  Chief 
of  the  Division  of  Economics  and  Statistics,  American  Commission 
to  Negotiate  Peace,  1918-1919;  Member  Economic  Advisory  Commit- 
tee— Committee  on  Statistics. 

Clarence  Mott  Wooley,  President  of  American  Radiator  Co.,  ap- 
pointed representative  of  Secretary  of  Commerce  on  War  Trade, 
Washington,  D.  C.,  1917,  104  West  Forty-second  Street,  New  York 
City — Committee  on  Organization,  Committee  on  Statistics,  Commit- 
tee on  Civic  Emergency  Measures. 


HISTORY  OF  BUSINESS   DEPRESSIONS  431 

Thos.  C.  Atkison,  Washington  Representative  of  the  National 
Grange,  Washington,  D.  C. — Committee  on  Agriculture. 

Edwin  H.  Brown,  Hewitt  &  Brown,  Architects,  Minneapolis,  Minn.; 
Chairman  Small  House  College  Service  Bureau — Committee  on  Con- 
struction. 

Alexander  E.  Cance,  Professor  of  Agricultural  Economics,  Massa- 
chusetts Agricultural  College,  Amherst,  Mass. — Executive  Secretary, 
Committee  on  Agriculture. 

Gray  Silver,  Washington  Representative  of  the  American  Farm 
Bureau  Federation,  Munsey  Building,  Washington,  D.  C. — Committee 
on  Agriculture. 

REPORTS  OF  CONFERENCES 

The  first  tasks  of  the  President's  Unemployment  Confer- 
ence were  to  canvass  the  available  figures  concerning  the 
numbers  of  men  now  out  of  work  in  various  parts  of  the 
United  States,  and  to  consider  the  best  means  of  mitigating 
the  suffering  threatened  by  the  existing  emergency.  While 
the  proportion  of  wage  and  salary  earners  now  out  of  work 
is  probably  somewhat  larger  than  at  any  previous  time  in 
our  history,  the  present  emergency  is  not  without  precedent. 
A  similar  situation  prevailed  in  the  winter  of  1914-15,  in 
1908,  and  in  1894,  to  go  no  further  back.  Four  times  in  a 
single  generation  the  numbers  of  the  unemployed  in  the 
United  States  have  been  counted  by  millions,  and  the  idle 
capital  of  the  country  has  been  counted  by  billions  of  dollars. 

The  conference  reports  were  detailed  and  lengthy  and 
only  brief  excerpts  of  importance  can  be  given  here  as  a 
matter  of  record  on  the  subject : 

"The  world-wide  scope  and  the  long  successions  of  busi- 
ness crises  do  not  prove  that  the  problem  of  controlling  the 
business  cycle  is  a  hopeless  one.  On  the  contrary,  history, 
when  examined  in  detail,  proves  that  the  problem  can  be 
solved  at  least  in  part,  for  the  leading  business  nations  have 
made  incontestable  progress  toward  diminishing  the  violence 
of  business  crises.  Each  step  in  this  direction  has  resulted 
from  a  wise  use  of  lessons  drawn  from  past  experience.  The 
creation  of  the  Federal  Reserve  System  is  a  notable  example 
of  American  achievement  in  this  field.  That  measure  pre- 
vented the  crisis  of  1920  from  degenerating  into  a  panic. 
Having  devised  a  method  of  mitigating  the  severity  of 


432  HISTORY   OF  BUSINESS   DEPRESSIONS 

crises,  we  can  with  good  prospects  of  success,  turn  out  con- 
structive efforts  to  the  further  problem  of  mitigating  the 
severity  of  depression.  The  ebb  and  flow  in  the  demand 
for  consumable  goods  may  not  be  subject  to  direct  control ; 
but,  on  the  other  hand,  it  should  be  possible  in  some  measure 
to  control  the  expansion  of  the  national  plant  and  equip- 
ment. If  all  branches  of  our  public  works  and  the  construc- 
tion work  of  our  public  utilities — the  railways,  the  tele- 
phones, etc — could  systematically  put  aside  financial  re- 
serves to  be  provided  in  times  of  prosperity  for  the  delib- 
erate purpose  of  improvement  and  expansion  in  times  of 
depressions,  we  would  not  only  greatly  decrease  the  depth 
of  depressions,  but  we  would  at  the  same  time  diminish  the 
height  of  booms.  We  would,  in  fact,  abolish  acute  unem- 
ployment and  wasteful  extravagance.  For  a  rough  calcu- 
lation indicates  that  if  we  maintained  a  reserve  of  but  10 
per  cent  of  our  average  annual  construction  for  this  purpose 
we  could  almost  iron  out  the  fluctuations  in  employment." 

The  conference  presented  a  summary  of  its  recommenda- 
tions for  an  emergency  program  for  immediate  action,  con- 
cisely as  follows : 

The  problem  of  meeting  the  emergency  of  unemployment 
is  primarily  a  community  problem.  The  responsibility  for 
leadership  is  with  the  mayor  and  should  be  immediately 
assumed  by  him. 

The  basis  of  organization  should  be  an  emergency  com- 
mittee representing  the  various  elements  in  the  community. 
This  committee  should  develop  and  carry  through  a  com- 
munity plan  for  meeting  the  emergency,  using  existing 
agencies  and  local  groups  as  far  as  practicable.  One  immed- 
iate step  should  be  to  coordinate  and  establish  efficient  pub- 
lic employment  agencies  and  to  register  all  those  desiring 
work.  It  should  coordinate  the  work  of  the  various  chari- 
table institutions. 

The  Emergency  Committee  should  regularly  publish  the 
numbers  dependent  upon  them  for  employment  and  relief, 
that  the  community  may  be  appraised  of  its  responsibility. 
Begging  and  uncoordinated  solicitation  of  funds  should  be 
prevented. 

Private  houses,  hotels,  offices,  etc.,  can  contribute  to  the 
situation  by  doing  their  repairs,  cleaning  and  alterations 
during  the  winter  instead  of  waiting  until  spring,  when 
employment  will  be  more  plentiful. 


HISTORY   OF   BUSINESS   DEPRESSIONS  433 

Public  construction  is  better  than  relief.  The  municipali- 
ties should  expand  their  school,  street,  sewage,  repair  work 
and  public  buildings  to  the  fullest  possible  volume  compati- 
ble with  the  existing  circumstances.  That  existing  circum- 
stances are  favorable  is  indicated  by  the  fact  that  over  $700,- 
000,000  of  municipal  bonds,  the  largest  amount  in  history, 
have  been  sold  in  1921.  Of  these  $106,000,000  were  sold  by 
333  municipalities  in  August,  1921.  Municipalities  should 
give  short  time  employment  the  same  as  other  employers. 

The  Governor  should  unite  all  State  agencies  for  support 
of  the  mayors  and,  as  the  superior  officer,  should  insist  upon 
the  responsibility  of  city  officials,  should  do  everything  com- 
patible with  circumstances  in  expedition  of  construction 
of  roads,  State  buildings,  etc. 

The  Federal  authorities,  including  the  Federal  Reserve 
Banks,  should  expedite  the  construction  of  public  buildings 
and  public  work  covered  by  existing  appropriations. 

The  greatest  area  for  immediate  relief  of  unemployment 
is  in  the  construction  industry,  which  has  been  artificially 
restricted  during  and  since  the  war.  We  are  short  more 
than  a  million  homes,  all  kinds  of  building  and  construction 
are  far  behind  national  necessity.  The  Senate  Committee  on 
Reconstruction  and  Production,  in  March  of  this  year,  esti- 
mated the  total  construction  shortage  in  the  country  at  be- 
tween ten  and  twenty  billion  dollars.  Considering  all 
branches  of  the  construction  industries,  more  than  two  mil- 
lion people  could  have  been  employed  if  construction  were 
resumed.  Undue  cost  and  malignant  combinations  have 
made  proper  expansion  impossible  and  contributed  largely 
to  this  unemployment  situation.  In  some  places  these  mat- 
ters have  been  cleaned  up.  In  other  places  they  have  not, 
and  are  an  affront  to  public  decency.  In  some  places  these 
things  have  not  existed.  In  others  costs  have  been  adjusted. 
Some  materials  have  been  reduced  in  prices  as  much  as  can 
be  expected.  Where  conditions  have  been  righted  construc- 
tion should  proceed,  but  there  is  still  a  need  of  community 
action  in  providing  capital  on  terms  that  will  encourage 
home  building.  Where  the  costs  are  still  above  the  other  eco- 
nomic levels  of  the  community  there  should  be  searching  in- 
quiry and  action  in  the  situation.  We  recommend  that  the 
Governors  summon  representative  committees,  with  the 
cooperation  of  the  mayors,  or  otherwise  as  they  may  de- 
termine, to  (a)  determine  facts ;  (b)  to  organize  community 
action  in  securing  adjustments  in  cost,  including  combina- 


434  HISTORY  OF  BUSINESS  DEPRESSIONS 

tions,  restrictions  of  effort,  and  unsound  practices  where 
they  exist,  to  the  end  that  building  may  be  fully  resumed. 

Manufacturers  can  contribute  to  relieve  the  present  acute 
unemployment  situation  by — 

(a)  Part  time  work,  through  reduced  time  or  rotation 
of  jobs. 

(b)  As  far  as  possible  manufacturing  for  stock. 

(c)  Taking  advantage  of  the  present  opportunity  to  do 
as  much  plant  construction,  repairs,  and  cleaning  up  as  is 
possible,  with  the  consequent  transfer  of  many  employees  to 
other  than  their  regular  work. 

(d)  Reduction  of  the  number  of  hours  of  labor  per  day. 

(e)  The  reduction  of  the  work  week  to  a  lower  number 
of  days  during  the  present  period  of  industrial  depression. 

(f )  That  employees  and  employers  cooperate  in  putting 
these  recommendations  into  effect. 

During  the  period  of  drastic  economic  readjustment, 
through  which  we  are  now  passing,  the  continued  efforts  of 
anyone  to  profit  beyond  the  requirements  of  safe  business 
practice  or  economic  consistency  should  be  condemned.  One 
of  the  important  obstacles  to  a  resumption  of  normal  busi- 
ness activity  will  be  removed  as  prices  reach  replacement 
values  in  terms  of  efficient  producing  and  distributing  cost, 
plus  reasonable  profit. 

The  conference  presented  a  summary  of  matters  that  re- 
quired constructive  and  immediate  settlement  as  an  aid  to 
the  recovery  of  business : 

Readjustment  of  railway  rates  to  a  fairer  basis  of  the 
relative  value  of  commodities,  with  special  consideration  of 
the  rates  upon  primary  commodities,  at  the  same  time  safe- 
guarding the  financial  stability  of  the  railways. 

Definite  settlement  of  tariff  legislation  in  order  that  busi- 
ness may  determine  its  future  conduct  and  policies. 

Limitations  of  world  armament  and  consequent  increase 
of  tranquility  and  further  decrease  of  the  tax  burden  not 
only  of  the  United  States  but  other  countries. 

Steps  looking  to  the  minimizing  of  fluctuations  in  ex- 
change, because  recovery  from  the  great  slump  in  exports 
(due  to  the  economic  situation  in  Europe)  can  not  make 
substantial  progress  so  long  as  extravagant  daily  fluctua- 
tions continue  in  foreign  exchange,  for  no  merchant  can  de- 
termine the  delivery  cost  of  any  international  shipment. 


HISTORY  OF  BUSINESS  DEPRESSIONS  435 

The  committee  on  agriculture  reported  as  follows: 

There  is  no  acute  problem  of  unemployment  in  the  agri- 
cultural industry.  On  the  contrary,  this  industry  is  ab- 
sorbing or  at  least  providing  a  haven  for  great  numbers  of 
unemployed  from  the  industrial  centers.  In  the  face  of  fall- 
ing prices  and  vanishing  profits  farmers  have  maintained 
their  production  of  food  and  other  raw  material  even  when 
they  had  no  assurance  or  reasonable  hope  of  receiving  for 
their  products  an  amount  equal  to  their  production  costs. 

In  instances  they  have  done  this  on  mere  subsistence 
wages.  Cotton  farmers,  for  example,  have  willingly  ac- 
cepted from  banks  advances  of  $10  per  month  with  which 
to  pay  their  laborers  with  nothing  advanced  for  the  living 
of  their  own  families.  Railroad  freight  rates  on  commodi- 
ties transported  to  and  from  the  farm  must  be  substantially 
reduced  without  delay.  The  prices  of  materials,  farm 
implements,  and  supplies  must  be  adjusted  to  the  price  level 
of  farm  products.  Manufacturers  and  dealers  must  real- 
ize that  farmers  can  not,  at  present  price  levels,  resume 
normal  buying  and  thereby  restore  normal  employment. 

Better  credit  facilities  must  be  provided  for  agriculture 
which  will  furnish  funds  for  production,  and  orderly  mar- 
keting for  long  periods  suited  to  the  requirements  of  the 
industry,  at  reasonable  rates  of  interest  and  without  oppor- 
tunity for  the  unscrupulous  to  charge  unreasonable  commis- 
sions, premiums,  or  brokers  charges.  A  recent  nation- 
wide referendum  showed  that  tens  of  thousands  of  farmers 
have  been  paying  6  to  10  per  cent  interest,  plus  2  to  10  per 
cent  brokerage,  on  money  borrowed.  Exports  of  agricul- 
tural products  should  be  stimulated  with  the  aid  of  our  mer- 
chant marine,  foreign  credits,  and  by  such  other  proper 
means  and  encouragements  as  will  aid  foreign  commerce. 

History  is  repeating  itself.  Previous  wars  have  been 
followed  by  periods  of  depression  which  have  in  turn  been 
followed  by  prosperity.  Prosperity  has  come  with  the  re- 
vival of  agriculture  which  has  provided  an  expanding  do- 
mestic market  for  manufactured  products,  thus  restoring 
industrial  activity  with  the  employment  of  all  classes  of 
labor.  This  course  of  events  is  inevitable.  We  can  only 
hasten  or  retard  its  progress. 


CHAPTER  XLIV 
CONCLUSION 

Ferrero  in  his  book,  "Ancient  Rome  and  Modern 
America,"  tells  of  the  decline  of  the  great  empire.  He  de- 
scribes conditions  very  similar  to  those  existing  today.  The 
demand  of  the  people  was  for  wealth  and  luxury.  The 
cities  built  great  temples  and  amphitheaters  and  held  carni- 
vals and  festivals.  This  drew  the  population  from  the 
agricultural  districts  to  invade  the  cities  in  search  of  pleas- 
ure. These  centers  of  population  eventually  swarmed 
with  the  unemployed,  and  instead  of  placing  them  in  indus- 
tries that  would  produce  wealth,  the  empire  gave  them  em- 
ployment in  construction  of  more  public  buildings,  finally 
draining  the  agrarian  taxpayers  until  they  were  unable  to 
bear  the  burden.  We  have  only  to  read  the  history  of  the 
decline  of  Rome  to  learn  that  we  cannot  solve  the  problem 
of  depression  and  unemployment  simply  by  the  much  agi- 
tated plan  of  public  work.  Our  population  must  be  put 
to  production.  Otherwise  our  producing  classes  are  bound 
to  be  burdened  with  greater  taxes  in  order  to  keep  up  these 
public  works.  That  procedure  is  all  right  as  a  temporary 
expedient,  but  our  attention  must  be  directed  to  helping 
our  producing  industries  where  men  can  be  given  useful  em- 
ployment. Ferrero  says :  "If  not  destroyed,  modern  civi- 
lization might  be  profoundly  shaken  and  weakened  in  the 
event  of  its  imitating  the  policy  of  Rome  and  seeking  to 
favor  the  cities  overmuch  at  the  expense  of  the  country. 
There  is  a  further  lesson  to  be  learned  by  us  moderns  from 
the  history  of  the  Decadence  of  the  Roman  Empire,  and 
that  it,  not  to  mistake  the  glamour  of  the  external  manifes- 
tations of  wealth  and  power  for  signs  of  real  wealth  and 
power.  A  civlization  is  not  always  in  reality  richer  and 
stronger  in  times  when  it  bears  the  most  visible  marks  of 


HISTORY  OF   BUSINESS  DEPRESSIONS  437 

• 

so  being;  we  are  rather  apt  to  find  that,  when  it  is  most 
dazzling  in  outward  seeming,  its  decadence  has  already 
begun.  We  often  halt  in  stupefaction  and  admiration  before 
the  great  ruins  of  ancient  Rome,  especially  those  offered  by 
the  European  provinces  of  the  empire.  We  think  how 
great,  powerful  and  rich  must  have  been  the  empire  which 
could  rear  monuments  so  massive  that  all  the  centuries  have 
not  been  able  to  sweep  them  entirely  from  the  face  of  the 
earth.  And  yet,  if  we  are  to  look  at  these  relics  in  their 
right  light,  we  must  remember  that  practically  all  the  great 
Roman  monuments,  whose  remains  survive  to  our  day  on  a 
large  scale,  belong  to  the  Third,  Fourth  and  Fifth  Centu- 
ries of  the  Christian  era — to  the  centuries  of  decadence  and 
dissolution." 

Public  construction  work  and  private  repair  work,  giving 
employment  to  the  idle,  is  the  method  generally  adopted 
in  all  countries  to  help  get  business  back  to  normal.  The 
idea  is  held  that  every  dollar  paid  out  in  this  way  in  hard 
times  creates  demand  for  goods. 

Proposed  remedies  along  the  lines  of  the  Huber  Unem- 
ployment Bill,  recently  introduced  in  the  Wisconsin  Legisla- 
ture, will  be  watched  with  interest.  That  plan  provides  for 
a  system  of  unemployment  insurance.  Employers  would 
be  required  to  pay  an  annual  assessment  into  the  fund  to  be 
used  to  guarantee  a  given  number  of  days  employment  each 
week  to  workers  who  have  been  residents  of  the  State  for 
not  less  than  six  months.  Supporters  of  the  plan  claim  that 
employers  will  then,  of  their  own  accord,  so  adjust  their 
business  that  their  employees  will  be  taken  care  of  volun- 
tarily to  the  extent  of  the  provisions  of  the  law.  In  the 
meantime  certain  corporations  are  initiating  plans  of  in- 
suring their  employees  against  unemployment  through  va- 
rious methods,  mostly  by  setting  aside  a  certain  total  of  the 
payroll  with  the  consent  of  the  employees,  as  an  insurance 
fund,  the  employers  providing  an  equal  amount  and  guar- 
anteeing a  certain  minimum  employment  through  the  year 
regardless  of  conditions.  But  all  this  assumes  that  de- 


438  HISTORY  OF  BUSINESS  DEPRESSIONS 

pressions  will  continue  to  come  about.  What  is  needed 
is  measures  to  avoid  the  need  of  such  schemes.  Heretofore 
we  have  bent  our  energies  to  finding  a  cure,  but  henceforth 
we  must  work  along  the  lines  of  finding  a  preventive.  We 
hear  a  great  deal  about  a  guarantee  of  bank  deposits  and  a 
few  states  have  enacted  laws  that  guarantee  state  bank  de- 
posits, some  of  which  have  worked  out  very  well.  The  law 
has  probably  protected  the  depositor  against  loss.  But 
whether  it  would  be  practicable  to  apply  on  a  nation-wide 
scale  is  a  serious  question.  However,  a  law  for  deposit  in- 
surance would  be  needless  if  we  had  laws  to  protect  against 
dangerous  expansions  of  bank  credits ;  in  other  words,  reach 
the  cause.  If  the  cause  is  reached,  it  is  needless  to  legis- 
late regarding  ill-effects.  Such  laws  would  answer  a  two- 
fold purpose,  the  first  one  being  practically  a  deposit  guar- 
antee and  secondly,  insurance  against  crises  and  depressions. 

The  Federal  Reserve  Act,  while  admittedly  not  perfect, 
has  been  a  bulwark  of  strength  to  the  nation's  finances. 
Where  is  the  man  who  doubts  but  that  we  would  have  had 
a  crisis  and  panic  in  1920,  had  it  not  been  for  the  Federal 
Reserve  System?  We  are  bound  to  witness  more  or  less 
credit  fluctuation  constantly,  entirely  outside  of  crises,  to 
help  which  the  Federal  Reserve  has  its  place.  In  the  agri- 
cultural sections  the  amount  of  funds  needed  immediately 
after  the  crop  is  harvested  is  greater  than  at  other  times. 
An  elastic  currency  is  thus  provided  to  move  the  crops  so 
that  finance  in  the  rest  of  the  country  keeps  its  equilibrium. 
In  case,  also,  of  local  crop  failures  the  Federal  Reserve  is 
used  to  tide  over  a  bad  season,  to  carry  the  producers  until 
they  can  recuperate  their  losses  in  a  good  season.  Again 
in  case  of  catastrophe,  such  as  the  Baltimore  or  San  Fran- 
cisco fire,  the  shock  on  finances  attended  with  such  enor- 
mous losses  can  be  lessened  through  help  extended  by  the 
Federal  Reserve. 

Local  disasters  are  now  being  dealt  with  by  skilled  finan- 
ciers, through  well  organized  systems  of  transferring  re- 
sources where  needed  from  one  party  or  locality  to  another, 


HISTORY  OF  BUSINESS  DEPRESSIONS  439 

using  in  the  operation  the  maximum  of  credit  and  the  mini- 
mum of  gold. 

Legislative  acts  cannot  prevent  human  optimism,  but  they 
can  control  the  money  of  the  people  and  prevent  to  a  large 
extent  undue  acts  of  over-optimism.  We  all  agree  that 
we  must  have  better  control  of  credit  expansion  and  in 
order  to  do  so  we  must  control  those  who  cannot  control 
themselves. 

Our  great  difficulty  is  that  in  good  times  our  people  are 
quick  to  forget  the  periods  of  distress.  We  are  sure  there 
will  never  again  be  such  low  prices,  never  will  there  be  such 
unemployment,  never  such  depressed  conditions.  We  are 
certain  that  economic  troubles  are  a  thing  of  the  past. 

The  writer  planned  and  organized  the  Southern  Tariff  As- 
sociation in  1919,  at  'the  peak  of  the  boom,  and  I  shall  never 
forget  that  some  of  the  leading  business  men  of  the  South 
looked  at  me  in  amazement  and  told  me  that  they  were  very 
sure  that  we  would  never  have  need  for  a  protective  tariff 
in  this  country  again.  Inside  of  twelve  months  cotton  had 
fallen  from  35  cents  to  12  cents  a  pound;  foreign 
agricultural  products  were  flooding  the  country,  depressing 
prices  and  ruining  thousands  of  southern  planters  and  busi- 
ness men,  and  they  were  holding  mass  meetings  all  over 
that  section  demanding  relief. 

Depressions  thrive  on  uncertainty.  They  could  be  short- 
ened and  the  upward  movement  accelerated  by  a  uniform, 
collective  action  on  the  part  of  business  to  remove  uncer- 
tainty. The  individual  firm  or  corporation  may  have  liqui- 
dated its  output;  it  may  be  willing  to  add  additional  em- 
ployees, place  contracts  for  supplies  and  generally  push 
things  up  to  normal ;  but  they  are  held  back  by  the  constant 
fear  that  liquidation  has  not  run  its  course.  There  is  a  lack 
of  concerted  action  on  the  part  of  all  business  to  resume. 
The  individual  company  often  makes  a  mistake  and  suffers 
loss  in  its  patriotic  willingness  to  take  a  reasonable  chance 
and  push  ahead,  but  before  long  it  finds  itself  alone  in  the 
effort.  Others  are  not  ready  or  willing.  Likewise,  after 


440  HISTORY   OF   BUSINESS   DEPRESSIONS 

liquidation  has  run  its  course,  banks  become  overstocked 
with  money.  They  are  unable  to  make  loans  at  more  than 
normal  interest.  The  banker  likes  commercial  loans,  if  the 
collateral  is  good,  at  6,  7,  or  8  per  cent,  together  with  the 
feature  that  the  deposits  may  amount  to  25  per  cent  of 
the  loan.  This  is  preferable  to  bond  issues  at  4  or  5  per  cent, 
which  often  send  the  money  out  of  the  community  and  are 
neither  as  liquid  nor  as  profitable.  But  the  individual 
banker  who  may  be  ready  wants  to  wait  until  the  general 
upward  swing  is  underway  so  he  is  reasonably  certain  to 
have  his  loans  paid  when  they  become  due.  He  has  gone 
through  a  spell  of  slowly  liquidating  frozen  credits  and 
wants  to  avoid  getting  into  the  same  rut  again.  Therefore  it 
is  apparent  that  more  concerted  action  by  business  and 
finance  would  lead  us  more  quickly  out  of  the  valleys  of 
depression. 

The  banker  often  times  is  blind  to  the  public  welfare. 
Many  times  his  own  safety  is  uppermost  in  his  mind  to  such 
an  extent  that  he  will  abandon  the  interests  of  the  com- 
munity, allowing  business  to  collapse,  to  his  resultant  loss 
in  the  long  run.  But  as  the  progressive  banker  assumes 
more  and  more  the  modern  attitude  that  he  is  the  servant 
and  not  the  master  of  his  constituency,  he  will  be  more  apt 
to  follow  business  and  not  to  lead.  Even  today  most  of  the 
bigger  corporations  that  have  large  payrolls  and  commodity 
drafts  to  meet  control  their  own  banks.  They  are  not  de- 
pendent upon  the  independent  bankers  who  may  or  may  not. 
be  able  to  loan  their  requirements.  Even  smaller  business 
men  and  investors  are  often  in  position  to  dictate  to  their 
banker,  instead  of  their  banker  to  them.  Bankers  are 
human;  they  want  business,  and  business  consists  of  de- 
posits. They  cannot  get  good  fat  deposits  without  interest 
unless  they  extend  accomodations.  It  is  not  often  these 
days  that  a  business  man  crawls  into  a  bank  on  his  hands 
and  knees  and  begs  for  a  loan  of  a  few  dollars.  If  his  col- 
lateral is  ample  and  he  is  willing  to  pay  the  prevailing  rate 
on  commercial  paper,  he  is  smart  enough  to  know  that  he 


HISTORY   OF   BUSINESS   DEPRESSIONS  441 

is  doing  the  banker  a  favor.  All  of  this  leads  up  to  the  point 
I  wish  to  make,  namely,  that  the  banker  who  is  in  the  best 
position  to  watch  the  course  of  events  and  the  recognized 
barometers  of  business  is  going  to  be  so  dependent  upon  the 
business  men  that  these  eager  borrowers,  mad  for  money 
making,  will  press  him  into  over-expansion  against  his  will 
and  against  his  better  knowledge.  For  that  reason  the 
public,  the  business  man  and  investor  must  themselves  study 
the  question  of  business  depressions.  It  is  inevitable,  it  is 
beyond  any  power  we  have  or  will  likely  obtain,  to  prevent 
depression  or  contraction  following  over-stimulation,  specu- 
lation and  over-expansion.  The  principal  way  to  prevent 
depression  is  through  education,  because  through  education 
we  should  learn  moderation. 

Depressions  are  prolonged  by  the  instinct  and  practice  of 
the  trained  buyer  to  withhold  purchase  until  a  rising  mar- 
ket sets  in.  That  process  may  be  long  and  painful.  It  is, 
however,  something  beyond  the  control  of  the  individual 
buyer.  Often  times  prices  on  their  downward  trend  during 
a  depression  have  reached  the  point  where  the  buyer  is 
willing  to  go  into  the  market  to  supply  his  needs  for  present 
and  future,  but  he  will  not  do  so  as  long  as  the  trend  con- 
tinues downward.  If  things  could  start  upward  as  soon  as 
the  buyer  is  willing,  depressions  could  be  brought  to  shorter 
duration.  A  remedy  for  such  a  situation  could  be  found 
through  trade  associations.  In  a  great  many  commodity 
lines  trade  associations  already  exist  which  are  sufficiently 
strong  and  able  to  hold  their  product  at  a  reasonable  level. 
But  associations  will  never  properly  function  for  the  best 
economic  purposes  until  they  also  realize  that  they  must 
voluntarily  set  a  maximum  as  well  as  a  minimum.  During 
the  high  tide  of  1919  the  wheat  growers  were  offered  $2.00 
per  bushel  for  their  product.  They  held  out  for  higher 
prices,  then  the  depression  set  in  and  later  they  were  forced 
to  sell  for  slightly  over  $1.00  per  bushel.  In  that  same  year 
the  cotton  growers  were  offered  30  cents.  They  held  out  for 
40  cents,  and  a  great  many  were  finally  forced  to  sell  for  10 


442  HISTORY  OF  BUSINESS  DEPRESSIONS 

to  12  cents.  Had  they  been  sufficiently  organized  so  as  to 
set  a  reasonable  minimum  above  cost  of  production  allowing 
as  much  more  up  to  a  reasonable  maximum,  it  would  have 
been  a  great  benefit  both  to  their  members  and  to  the  public. 
The  same  conditions  existed  with  some  branches  of  the  lum- 
ber industry  that  had  an  understanding  among  the  members 
(some  claim  unlawful)  that  certain  prices  were  to  be  asked. 
These  prices  were  so  unreasonable  that  the  public  revolted, 
causing  the  most  severe  depression  in  the  lumber  industry 
that  it  has  known  for  years.  Had  these  interests  not  been 
unreasonable  the  buyers'  strike  in  their  commodity  could 
have  been  largely  averted,  because  great  sums  of  money 
were  ready  to  be  invested  in  the  building  industry.  When 
trade  associations  take  into  consideration  the  interests  of 
the  people  as  well  as  their  own,  they  will  have  it  in  their 
power  to  help  largely  in  avoiding  depressions. 

What  deceives  the  average  business  man  is  orders  booked. 
Manufacturers  and  contractors  report  unfilled  orders  carry- 
ing them  far  into  the  future,  and  these  go  out  in  statistical 
reports.  They  forget,  as  they  painfully  did  in  1920,  that 
those  orders  may  be  cancelled  over  night. 

We  not  only  need  greater  vigilance  on  the  part  of  the  busi- 
ness man,  but  the  authorized  departments  of  the  govern- 
ment should  watch  for  special  conditions  affecting  future 
trade.  After  they  have  the  facts,  they  should  boldly  place 
those  conditions  before  the  public,  regardless  of  who  they 
may  immediately  affect.  When  the  Department  of  Agri- 
culture first  began  gathering  statistics  so  as  to  make  prog- 
nostications of  coming  crops  they  met  with  every  hindrance. 
Many  attempts  were  made  to  stop  it.  Various  interests  were 
obviously  affected  by  whatever  reports  might  be  sent  broad- 
cast, and  those  whose  interests  were  adversely  affected 
naturally  made  bitter  complaint.  For  years  we  have  heard 
that  the  department's  figures  could  not  be  taken  as  authori- 
tative, but  while  some  mistakes  were  made  at  first,  the 
organization  was  soon  improved,  and  today  we  hear  little 


HISTORY  OF   BUSINESS   DEPRESSIONS  443 

complaint  against  the  practice  of  sending  out  reports  or 
against  the  correctness  of  the  reports. 

There  should  be  a  special  corps  of  experts  under  a  special 
bureau  whose  duties  it  would  be  to  keep  the  country  posted 
as  to  exact  conditions.  The  experts  in  charge  of  this 
bureau  should  come  jointly  from  the  Departments  of  Com- 
merce, Labor,  Agriculture,  and  the  Treasury.  They  should 
have  their  fingers  on  the  pulse  of  business,  manufacturing, 
agriculture,  employment  and  finances. 

Because  we  have  always  had  depressions  is  no  reason  why 
we  always  shall  have.  We  used  to  think  we  should  always 
have  panics,  but  now  the  most  advanced  countries  are  prac- 
tically secure  against  them.  Even  when  the  German  army 
threw  shells  into  Paris  there  was  no  financial  panic.  We 
can  control  the  situation  both  against  our  own  mistakes 
and  extravagances  as  well  as  against  natural  causes,  but  to 
say  that  we  can  avoid  depressions  entirely  would  be  beyond 
reason.  We  shall  most  likely  always  have  wars,  natural  dis- 
asters, crop  failures  and  labor  difficulties,  but  provision  can 
be  made  against  them  so  that  the  sharp  edges  are  taken  off 
and  their  effects  largely  mitigated. 

It  is  necessary  that  we  establish  a  school  of  thought  on 
economic  history  in  order  that  the  rising  business  generation 
may  profit  more  from  our  past  experience.  Our  business 
men  must  be  intelligent  observers  of  events  at  large  and 
sagacious  interpreters  of  symptoms. 

Sir  A.  Conan  Doyle  may  be  said  to  be  an  authority  on 
mysteries.  He  says  the  reason  many  mysteries  remain  un- 
solved so  long  is  that  men  reason  forward  instead  of  reason- 
ing backward.  If  we  are  going  to  reach  a  solution  that  will 
help  us  in  problems  of  depression  we  cannot  do  it  by 
theorizing,  but  we  can  make  some  headway  by  making  use 
of  the  lessons  of  the  past  and  studying  the  history  of  those 
which  have  gone  before. 

Even  though  we  may  work  out  a  system  that  will  prove 
effective  against  these  evil  days,  we  have  to  consider  that 
we  may  still  be  affected  by  what  transpires  economically  in 


444  HISTORY   OF   BUSINESS   DEPRESSIONS 

other  countries.  It  is  true  that  our  foreign  trade  amounts 
to  less  than  5  per  cent  of  our  total,  and  it  is  possible  for  us 
to  prosper  without  regard  to  it,  yet  it  stands  to  reason 
that  our  foreign  trade  will  grow  in  proportion  in  the  future 
and  conditions  abroad  are  going  to  have  an  increasing 
psychological  effect.  It  therefore  behooves  us  not  only  to 
put  our  own  house  in  order  but,  for  our  own  selfish  interests, 
we  must  get  our  heads  together  around  the  table  with  the 
representatives  of  other  nations  and  help  them  solve  their 
problems.  Whether  we  do  this  through  the  instrument  of 
the  League  of  Nations  or  some  other  body  of  similar  nature 
does  not  matter,  but  it  must  be  done.  No  one  knows  better 
than  the  business  man  how  dependent  we  are  upon  other 
countries  and  how  we  are  affected  by  their  economic  condi- 
tions. When  we  can  sit  on  Long  Island  or  in  Washington 
and  talk  to  Berlin,  Moscow,  Japan,  or  South  America  by 
wireless,  we  must  know  that  the  world  has  grown  so  small 
that  what  affects  one  materially  is  bound  to  affect  another. 
The  war  went  around  the  world ;  the  influenza  went  around 
the  world,  and  the  depression  of  1920  went  around  the 
world. 

In  1920  the  nation  lost  $5,000,000,000  in  decreased  values 
of  farm  products,  $5,000,000,000  more  in  the  loss  of  earning 
power  among  labor,  and  untold  weaitn  in  depre- 
ciated values  of  property  and  business  stocks,  while  the  fi- 
nancial system  lost  millions  in  failures.  What  we  lost 
in  this  one  single  depression  would  pay  the  national  debt. 

Business  men  who  have  made  a  study  of  the  question  have 
become  thoroughly  imbued  with  the  idea  that  these  depres- 
sions run  in  cycles  and  will  always  come.  Instead  of  join- 
ing in  efforts  to  prevent  them  they  adjust  themselves  to 
anticipate  them.  As  the  question  is  studied  more  and  more 
the  idea  of  the  cycle  comes  just  that  much  more  to  prevail 
and  the  rising  generation  is  taught  the  idea  of  the  cycle.  We 
are  never  going  to  get  anywhere  along  these  lines.  We 
must  stop  propagating  the  cycle  idea  and  work  along  more 
constructive  lines.  In  other  words,  we  must  endeavor  to 


HISTORY   OF   BUSINESS   DEPRESSIONS  445 

eliminate  depressions  instead  of  giving  up  to  the  idea  that 
they  are  a  fixed  evil  in  our  economic  life.  They  have  led 
to  a  great  deal  of  economic  suffering  in  the  past  and  will  do 
so  in  the  future,  unless  they  are  curbed.  Some  day  one 
of  them  will  get  away  from  us.  In  1921  we  were  threatened 
with  a  gigantic  railroad  strike.  The  public  thought  it  was 
outrageous  that  a  million  men  should  quit  their  jobs  when 
there  were  four  million  others  out  of  employment.  Rail- 
road managers  took  the  stand  that  they  did  not  care  if  the 
men  did  strike,  as  that  would  give  them  the  opportunity 
to  put  the  wage  scale  still  lower.  But  secretly,  the  wiser 
railroad  heads  dreaded  a  strike  and  so  did  the  wiser  Govern- 
ment officials,  because  underneath  the  surface  there  were 
ominous  possiblities.  Leaders  of  other  labor  unions  ad- 
vised against  the  strike  and  notified  the  railroad  workers 
that  they  would  not  support  them,  but  suppose  there  had 
been  more  radical  men  at  the  head  of  the  labor  organiza- 
tions, as  there  might  be  at  some  future  time,  and  a  great 
strike  was  on ;  at  the  start  of  the  first  riot  there  would  have 
been  a  portentous  army  of  four  million  unemployed,  as  large 
as  we  put  under  training  in  the  World  War.  Augmented  by 
general  dissatisfaction  on  the  part  of  the  people  as  a  whole, 
who  could  tell  what  might  have  happened?  Some  day  we 
are  going  to  sit  by  and  allow  one  of  these  depressions  to  run 
its  course,  so  we  think,  and  in  such  a  time  when  the  people 
are  dissatisfied,  when  they  have  suffered  loss  and  incon- 
venience, when  millions  are  out  of  employment  and  other 
thousands  facing  ruin  and  in  such  state  of  mind  that  men 
become  resolved,  a  lighted  match  in  some  spot  will  cause  a 
blaze  that  might  envelope  the  nation.  This  will  come  when 
we  least  expect  it,  when  we  sit  in  false  security,  when  we 
think  it  cannot  happen.  And  when  that  time  comes — if  it 
should  come — we  will  see  our  mistake  in  accepting  the  prin- 
ciple that  these  periods  are  unavoidable.  Before  this  hap- 
pens is  the  time  to  adopt  such  means  as  are  necessary  to 
avoid  the  speculative  and  profiteering  debauches  which 
cause  them. 


446  HISTORY  OF  BUSINESS   DEPRESSIONS 

We  can  avoid  these  difficulties  by  looking  more  to  the 
spiritual  side,  keeping  constantly  in  mind  that  the  continu- 
ance of  good  times  and  reasonable  prosperity  depends  upon 
true  aims,  fair  profits,  conscientious  service,  and  moderation 
in  our  desires.  We  must  get  past  that  false  philosophy  made 
possible  by  "David  Harum"  and  "Get-Rich-Quick  Walling- 
ford"  which  lionized  the  trickster  and  applauded  the  shrewd 
individual  who  "put  something  over"  on  the  other  fellow  and 
got  away  with  it. 

The  established  order  shows  the  way.  The  sun  ascends 
and  sets,  the  tides  rise  and  fall,  the  winds  come  and  go,  the 
seasons  follow  one  another,  all  smoothly  and  in  order,  as  the 
poet  might  express  it — in  perfect  unison  with  the  music 
of  the  sphere.  So  when  we  have  reached  the  higher  state  of 
perfection  to  which  we  constantly  aspire,  we  may  learn  to 
regulate  our  economic  life  so  that  even  with  the  vacillations 
which  must  take  place  it  will  follow  the  smooth  undula- 
tions of  nature  herself. 

Depression  is  a  punishment  for  economic  immorality. 
We  can  avoid  it  then  by  tuning  our  business  life  to  re- 
straint and  unselfishness.  Cleanse  it  of  greed  and  injustice, 
and  when  we  do  this  we  will  have  good  times,  because  we 
deserve  them.  Then  will  the  sun  of  prosperity  shine  on  our 
beautiful  America  through  the  clouds  of  distress,  and  these 
dread  intervals  of  darkness  will  come  no  more. 


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HISTORY  OF  BUSINESS  DEPRESSIONS  451 

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452  HISTORY   OF   BUSINESS   DEPRESSIONS 

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HISTORY   OF  BUSINESS   DEPRESSIONS  453 

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Among  publications  containing  information  used  in  this  work  are: 
Commercial  and  Financial  Chronicle,  New  York;  New  York  Post;  New 
York  Times;  Washington  Herald;  Philadelphia  Public  Ledger;  London 
Economist,  Bankers  Magazine,  London;  Wall  Street  Journal;  Nile's 
Register  (Publication  files  .1811-1849);  Report  of  Boston  Board  of 
Trade  Committee  1858  to  make  Investigation  of  Financial  and  Mer- 
cantile Embarrassments;  Commercial  Year  Book;  Seybert's  Statistical 
Annals;  Pitkin's  Statistical  View;  Speeches  in  Congress  from  Annals 
of  Congress  and  Reports  of  Committees,  (Select  Committee  on  De- 
pressions in  Labor  and  Business,  1879;)  Reports  of  the  Secretary  of 
the  Treasury  of  the  United  States,  1789-1849;  Charts  Illustrating  the 
Statistics  of  Trade,  Employment,  and  Conditions  of  Labor,  St.  Louis 
Exhibition,  1904  (Published  by  Bureau  of  Statistics,  Dept.  of  Com- 


454  HISTORY  OF  BUSINESS   DEPRESSIONS 

merce);   American  Economic  Review   (Published  by   American  Eco- 
nomic Association)  1911. 

The  publications  of  the  mercantile  agencies,  Dun  and  Bradstreet, 
furnish  authoritative  statistics  on  commercial  and  bank  failures. 
Consular  reports  issued  by  the  State  Department  furnish  information 
regarding  industrial  conditions  in  foreign  countries.  Bulletins  and 
reports  of  the  Department  of  Labor  contain  concise  information  on 
unemployment.  The  records  of  the  Treasury  Department  contain 
valuable  documents  on  coinage,  currency,  production  of  precious 
metals,  and  tariff  statistics.  The  Bureau  of  Statistics  under  the 
Department  of  Commerce  issues  the  Statistical  Abstract  which  con- 
tains a  valuable  collection  of  material  on  the  important  industries, 
such  as  cotton,  iron  and  steel  and  general  manufacturers.  The  De- 
partment of  Agriculture  issues  reliable  statistical  information  on 
crop  production  and  consumption.  The  Library  of  Congress  at  Wash- 
ington where  most  of  the  material  was  gathered  contains  countless 
files  of  newspapers,  periodicals,  reports,  pamphlets,  etc.,  and  is  a 
mine  of  information  on  the  subject. 


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